[Federal Register Volume 80, Number 246 (Wednesday, December 23, 2015)]
[Proposed Rules]
[Pages 80058-80111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-31702]
[[Page 80057]]
Vol. 80
Wednesday,
No. 246
December 23, 2015
Part III
Securities and Exchange Commission
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17 CFR Parts 240 and 249b
Disclosure of Payments by Resource Extraction Issuers; Proposed Rule
Federal Register / Vol. 80, No. 246 / Wednesday, December 23, 2015 /
Proposed Rules
[[Page 80058]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249b
[Release No. 34-76620; File No. S7-25-15]
RIN 3235-AL53
Disclosure of Payments by Resource Extraction Issuers
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing Rule 13q-1 and an amendment to Form SD to
implement Section 1504 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act relating to disclosure of payments by resource
extraction issuers. Rule 13q-1 was initially adopted by the Commission
on August 22, 2012, but it was subsequently vacated by the U.S.
District Court for the District of Columbia. Section 1504 of the Dodd-
Frank Act added Section 13(q) to the Securities Exchange Act of 1934,
which directs the Commission to issue rules requiring resource
extraction issuers to include in an annual report information relating
to any payment made by the issuer, a subsidiary of the issuer, or an
entity under the control of the issuer, to a foreign government or the
Federal Government for the purpose of the commercial development of
oil, natural gas, or minerals. Section 13(q) requires a resource
extraction issuer to provide information about the type and total
amount of such payments made for each project related to the commercial
development of oil, natural gas, or minerals, and the type and total
amount of payments made to each government. In addition, Section 13(q)
requires a resource extraction issuer to provide information about
those payments in an interactive data format.
DATES: We are providing two comment periods for this proposal. Initial
comments are due on January 25, 2016. Reply comments, which may respond
only to issues raised in the initial comment period, are due on
February 16, 2016. In developing the final rules, the Commission may
rely on both new comments and comments that have been received to date,
including those that were provided in connection with the prior rules
that the Commission issued under Section 13(q).
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment forms (http://www.sec.gov/rules/proposed.shtml);
Send an email to [email protected]. Please include
File Number S7-25-15 on the subject line; or
Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-25-15. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
also are available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street NE., Room 1580,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change; we do not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.
Studies, memoranda or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the SEC's Web site. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Shehzad K. Niazi, Special Counsel;
Office of Rulemaking, Division of Corporation Finance, at (202) 551-
3430; or Elliot Staffin, Special Counsel; Office of International
Corporate Finance, Division of Corporation Finance, at (202) 551-3450,
U.S. Securities and Exchange Commission, 100 F Street NE., Washington,
DC 20549.
SUPPLEMENTARY INFORMATION: We are proposing Rule 13q-1 \1\ and an
amendment to Form SD \2\ under the Securities Exchange Act of 1934
(``Exchange Act'').\3\
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\1\ 17 CFR 240.13q-1.
\2\ 17 CFR 249.448.
\3\ 15 U.S.C. 78a et seq.
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Table of Contents
I. Introduction and Background
A. Section 13(q) of the Exchange Act
B. The 2012 Rules and Litigation
C. Developments Subsequent to the 2013 Court Decision
D. Summary of Proposed Rules
E. Objectives of Section 13(q)'s Required Disclosures and the
Proposed Rules
1. The U.S. Government's Foreign Policy Interest in Reducing
Corruption in Resource-Rich Countries
2. Reasons for Proposing Issuer-Specific, Project-Level, Public
Disclosures of Resource Extraction Payments
II. Proposed Rules Under Section 13(q)
A. Definition of ``Resource Extraction Issuer''
B. Definition of ``Commercial Development of Oil, Natural Gas,
or Minerals''
C. Definition of ``Payment''
1. Types of Payments
2. The ``Not De Minimis'' Requirement
D. Payments by ``a Subsidiary . . . or an Entity Under the
Control of . . .''
E. Definition of ``Project''
1. General
2. The API Proposal
F. Definition of ``Foreign Government'' and ``Federal
Government''
G. Disclosure Required and Form of Disclosure
1. Annual Report Requirement
2. Public Filing
3. Exemption From Compliance
4. Alternative Reporting
5. Exhibits and Interactive Data Format Requirements
6. Treatment for Purposes of Securities Act and Exchange Act
H. Effective Date
I. General Request for Comment
III. Economic Analysis
A. Introduction and Baseline
B. Potential Effects Resulting From the Payment Reporting
Requirement
1. Benefits
2. Costs
C. Potential Effects Resulting From Specific Implementation
Choices
1. Exemption From Compliance
2. Alternative Reporting
3. Definition of Control
4. Definition of ``Commercial Development of Oil, Natural Gas,
or Minerals''
5. Types of Payments
6. Definition of ``Not De Minimis''
7. Definition of ``Project''
8. Annual Report Requirement
9. Exhibit and Interactive Data Requirement
D. Request for Comments
IV. Paperwork Reduction Act
A. Background
B. Estimate of Issuers
C. Estimate of Issuer Burdens
D. Solicitation of Comments
V. Small Business Regulatory Enforcement Fairness Act
VI. Initial Regulatory Flexibility Act Analysis
A. Reasons for, and Objectives of, the Proposed Action
B. Legal Basis
C. Small Entities Subject to the Proposed Rules
[[Page 80059]]
D. Reporting, Recordkeeping, and Other Compliance Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
G. Request for Comment
I. Introduction and Background
On August 22, 2012, the Commission adopted a rule and form
amendments \4\ (the ``2012 Rules'') to implement Section 13(q) of the
Exchange Act. The 2012 Rules were vacated by the U.S. District Court
for the District of Columbia by order dated July 2, 2013. In light of
the court's order, we are re-proposing Rule 13q-1 and proposing an
amendment to Form SD to implement Section 13(q).
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\4\ See Exchange Act Release No. 67717 (Aug. 22, 2012), 77 FR
56365 (Sept. 12, 2012) available at http://www.sec.gov/rules/final/2012/34-67717.pdf (the ``2012 Adopting Release''). See also Exchange
Act Release No. 63549 (Dec. 15, 2010), 75 FR 80978 (Dec. 23, 2010)
available at http://www.sec.gov/rules/proposed/2010/34-63549.pdf
(the ``2010 Proposing Release'').
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A. Section 13(q) of the Exchange Act
Section 13(q) was added in 2010 by Section 1504 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (``the Act'').\5\ It
directs the Commission to ``issue final rules that require each
resource extraction issuer to include in an annual report . . .
information relating to any payment made by the resource extraction
issuer, a subsidiary of the resource extraction issuer, or an entity
under the control of the resource extraction issuer to a foreign
government or the Federal Government for the purpose of the commercial
development of oil, natural gas, or minerals, 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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\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 statutory text and the legislative history, we
understand that Congress enacted Section 1504 to increase the
transparency of payments made by oil, natural gas, and mining companies
to governments for the purpose of the commercial development of their
oil, natural gas, and minerals. As discussed in more detail below, the
legislation reflects U.S. foreign policy interests in supporting global
efforts to improve transparency in the extractive industries. The goal
of such transparency is to help combat global corruption and empower
citizens of resource-rich countries to hold their governments
accountable for the wealth generated by those resources.\7\
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\7\ See, e.g., 156 Cong. Rec. S3816 (daily ed. May 17, 2010)
(Statement of Senator Lugar, one of the sponsors of Section 1504)
(``Adoption of the Cardin-Lugar amendment would bring a major step
in favor of increased transparency at home and abroad. . . . More
importantly, it would help empower citizens to hold their
governments to account for the decisions made by their governments
in the management of valuable oil, gas, and mineral resources and
revenues. . . . The essential issue at stake is a citizen's right to
hold its government to account. Americans would not tolerate the
Congress denying them access to revenues our Treasury collects. We
cannot force foreign governments to treat their citizens as we would
hope, but this amendment would make it much more difficult to hide
the truth.''); id. at S3817-18 (May 17, 2010) (Statement of Senator
Dodd) (``[C]ountries with huge revenue flows from energy development
also frequently have some of the highest rates of poverty,
corruption and violence. Where is all that money going? [Section
13(q)] is a first step toward addressing that issue by setting a new
international standard for disclosure.'').
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Section 13(q) provides the following definitions 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; \8\
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\8\ 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; \9\
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\9\ 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;
\10\ and
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\10\ 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 (``EITI'') (to the extent practicable),
determines are part of the commonly recognized revenue stream for the
commercial development of oil, natural gas, or minerals.\11\
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\11\ 15 U.S.C. 78m(q)(1)(C).
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Section 13(q) specifies that ``[t]o the extent practicable, the
rules . . . shall support the commitment of the Federal Government to
international transparency promotion efforts relating to the commercial
development of oil, natural gas, or minerals.'' \12\ As noted above in
the definition of ``payment,'' the statute explicitly refers to an
international initiative, the EITI.\13\ Although the separate provision
in Section 13(q) about supporting the Federal Government's commitment
to international transparency efforts does not explicitly mention the
EITI,\14\ the legislative history indicates that the EITI was
considered in connection with the new statutory provision.\15\ On March
19, 2014, the United States completed the process of becoming an EITI
candidate country,\16\ with its first mandatory report due within two
years of the approval of its application.\17\ In re-
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proposing rules, we have considered the guidance in the EITI Standard
and EITI Handbook on what should be included in a country's EITI
plan,\18\ as well as reports made by EITI member countries.
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\12\ 15 U.S.C. 78m(q)(2)(E).
\13\ The EITI is a voluntary coalition of oil, natural gas, and
mining companies, foreign governments, investor groups, and other
international organizations. The coalition was formed with industry
participation and describes itself as being dedicated to fostering
and improving transparency and accountability in resource-rich
countries through the publication and verification of company
payments and government revenues from oil, natural gas, and mining.
See Implementing EITI for Impact--A Handbook for Policymakers and
Stakeholders (2011) (``EITI Handbook''), at xii. A country
volunteers to become an EITI candidate and must complete an EITI
validation process to become a compliant member. Currently 49
countries are EITI implementing countries. See https://eiti.org/countries/ (last visited Dec. 8, 2015). Of those, 31 have achieved
``EITI compliant'' status, four have their EITI status temporarily
suspended, and the rest are implementing the EITI requirements but
are not yet compliant. Id. Several countries not currently a part of
the EITI have indicated their intention to implement the EITI. See
https://eiti.org/countries/other (last visited Dec. 8, 2015).
\14\ 15 U.S.C. 78m(q)(2)(E).
\15\ See, e.g., 156 Cong. Rec. S3816 (daily ed. May 17, 2010)
(Statement of Senator Lugar) (``This domestic action will complement
multilateral transparency efforts such as the Extractive Industries
Transparency Initiative--the EITI--under which some countries are
beginning to require all extractive companies operating in their
territories to publicly report their payments.'').
\16\ When becoming an EITI candidate, a country must establish a
multi-stakeholder group, including representatives of civil society,
industry, and government, to oversee implementation of the EITI. The
stakeholder group for a particular country agrees to the terms of
that country's EITI plan, including the requirements for what
information will be provided by the governments and by the companies
operating in that country. Generally, under the EITI, companies and
the host country's government submit payment information
confidentially to an independent administrator selected by the
country's multi-stakeholder group, which is frequently an
independent auditor. The auditor reconciles the information provided
to it by the government and by the companies and produces a report.
While the information provided in the reports varies among
countries, the reports must adhere to the EITI requirements provided
in the EITI Standard (2013). See the EITI's Web site at http://eiti.org (last visited Dec. 8, 2015).
\17\ In December 2012, the U.S. government established a multi-
stakeholder group, the USEITI Advisory Committee, headed by the
Department of the Interior (``DOI'') and including the Departments
of Energy and Treasury, as well as members of industry and civil
society. See Multi-Stakeholder Group List of Members, at http://www.doi.gov/eiti/FACA/upload/List-of-Members_03-16-15.pdf. USEITI's
current plans include producing its first report in December 2015,
and producing its second report and submitting it to the EITI board
in December 2016. See 2015 Workplan--USEITI, available at http://www.doi.gov/eiti/FACA/upload/WORKPLAN-2015-12_19_14-final.pdf. See
also letter from Department of Interior Office of Natural Resources
Revenue (Nov. 6, 2015) (``DOI 1'').
\18\ The EITI Standard encompasses several documents fundamental
to the EITI: (1) The ``EITI Principles,'' which set forth the
general aims and commitments of EITI participants; (2) the ``EITI
Requirements,'' which must be followed by countries implementing the
EITI; (3) the ``Validation Guide,'' which provides guidance on the
EITI validation process; (4) the ``Protocol: Participation of Civil
Society,'' which provides guidance regarding the role of civil
society in the EITI; and (5) documents relevant to the governance
and management of the EITI (e.g., the EITI Articles of Association,
the EITI Openness Policy, and the draft EITI Code of Conduct). The
EITI Handbook provides guidance on implementing the EITI, including
overcoming common challenges to EITI implementation.
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Pursuant to Section 13(q), the rules must require a resource
extraction issuer to submit the payment information included in an
annual report in an interactive data format \19\ using an interactive
data standard established by us.\20\ 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.\21\ It also defines ``interactive data standard'' as a
standardized list of electronic tags that mark information included in
the annual report of a resource extraction issuer.\22\ Section 13(q)
also requires that the rules include electronic tags that identify, for
any payments made by a resource extraction issuer to a foreign
government or the Federal Government:
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\19\ 15 U.S.C. 78m(q)(2)(C).
\20\ 15 U.S.C. 78m(q)(2)(D).
\21\ 15 U.S.C. 78m(q)(1)(E).
\22\ 15 U.S.C. 78m(q)(1)(F).
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The total amounts of the payments, by category;
the currency used to make the payments;
the financial period in which the payments were made;
the business segment of the resource extraction issuer
that made the payments;
the government that received the payments and the country
in which the government is located; and
the project of the resource extraction issuer to which the
payments relate.\23\
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\23\ 15 U.S.C. 78m(q)(2)(D)(ii).
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Section 13(q) further authorizes the Commission to require
electronic tags for other information that we determine are necessary
or appropriate in the public interest or for the protection of
investors.\24\
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\24\ Id.
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Section 13(q) requires, to the extent practicable, that the
Commission make publicly available online a compilation of the
information required to be submitted by resource extraction issuers
under the 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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Finally, Section 13(q) provides that the final rules ``shall take
effect on the date on which the resource extraction issuer is required
to submit an annual report relating to the fiscal year . . . that ends
not earlier than one year after the date on which the Commission issues
final rules . . . .'' \26\
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\26\ 15 U.S.C. 78m(q)(2)(F).
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B. The 2012 Rules and Litigation
We adopted final rules implementing Section 13(q) on August 22,
2012.\27\ In October 2012, the American Petroleum Institute (``API''),
the U.S. Chamber of Commerce, and two other industry groups challenged
the 2012 Rules.\28\ On July 2, 2013, the U.S. District Court for the
District of Columbia vacated the rules.\29\ The court based its
decision on two findings: First, that the Commission misread Section
13(q) to compel the public disclosure of the issuers' reports; and
second, the Commission's explanation for not granting an exemption for
when disclosure is prohibited by foreign governments was arbitrary and
capricious. On September 18, 2014, Oxfam filed suit in the U.S.
District Court for the District of Massachusetts to compel the
Commission to promulgate a final rule implementing Section 1504. Oxfam
asked the court to compel the Commission to:
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\27\ We received over 150 unique comment letters on the 2010
Proposing Release, as well as over 149,000 form letters (including a
petition with 143,000 signatures). The letters, including the form
letters designated as Type A, Type B, and Type C, are available at
http://www.sec.gov/comments/s7-42-10/s74210.shtml. In addition, to
facilitate public input on the Act before the official comment
periods opened, 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 2010 Proposing
Release, are available on our Web site at http://www.sec.gov/comments/df-title-xv/specialized-disclosures/specialized-disclosures.shtml. Many commenters provided comments prior to, in
response to, and after the 2010 Proposing Release. Comments received
after the 2012 Adopting Release are available at http://www.sec.gov/comments/df-title-xv/resource-extraction-issuers/resource-extraction-issuers.shtml.
\28\ See API et al. v. SEC, No. 12-1668 (D.D.C. Oct. 10, 2012).
Petitioners also filed suit in the U.S. Court of Appeals for the
D.C. Circuit, which subsequently dismissed the suit for lack of
jurisdiction. See API v. SEC, 714 F. 3d 1329 (D.C. Cir. 2013).
\29\ See API v. SEC, 953 F. Supp. 2d 5 (D.D.C., 2013) (``API
Lawsuit'').
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Issue a proposed rule within 30 days of the granting of
summary judgment in its favor or on August 1, 2015, whichever comes
first;
open a 45-day period for public notice and comment; and
promulgate a final rule within 45 days after the end of
said period, with the final rule promulgated no later than November 1,
2015.
On September 2, 2015, the court issued an order holding that the
Commission unlawfully withheld agency action by not promulgating a
final rule.\30\ The court concluded that despite the earlier adoption
of final rules and vacatur by the U.S. District Court for the District
of Columbia, ``the duty to promulgate a final extraction payments
disclosure rule remains unfulfilled more than four years past
Congress's deadline.'' The Commission filed an expedited schedule for
promulgating the final rule with the court on October 2, 2015. Pursuant
to that proposed expedited schedule, the Commission would vote on the
adoption of a final rule in June 2016.\31\
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\30\ See Oxfam America, Inc. v. United States Securities and
Exchange Commission, Civil Action, No. 14-13648 (DJC), 2015 WL
5156554 (D. Mass. Sept. 2, 2015).
\31\ In the Notice of Proposed Expedited Rulemaking Schedule,
the Commission also advised the court of several factors that may
result in variation from the proposed expedited schedule. These
factors include the overall volume of the Commission's work, the
Commission's inability to guarantee a favorable vote from a majority
of its Commissioners, and the possibility that exigencies may arise
that may make it impracticable for the Commission to meet the
proposed deadline (e.g., a government shut-down, relevant
international developments, unexpected relevant legal developments).
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C. Developments Subsequent to the 2013 Court Decision
Since the U.S. District Court for the District of Columbia's
decision in 2013, the European Parliament and Council of the European
Union have adopted two directives that include payment disclosure rules
similar to the 2012 Rules.\32\ The EU Accounting Directive
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and the EU Transparency Directive (the ``EU Directives'') determine the
baseline requirements for oil, gas, mining, and logging companies to
disclose annually the payments they make to governments on a by country
and by project basis.\33\ The EU Accounting Directive regulates the
provision of financial information by all ``large'' companies \34\
incorporated under the laws of a European Economic Area (``EEA'')
member state.\35\ It requires covered oil, gas, mining, and logging
companies to disclose specified payments to governments. The EU
Transparency Directive applies these disclosure requirements to all
companies listed on EU-regulated markets \36\ even if they are not
registered in the EEA or are incorporated in other countries.\37\ The
EU Directives determine the applicability and scope of the requirements
and set the baseline for what has to be reported in each member
country. Member states are, however, granted some leeway for when the
report is due and what penalties will result from violations of the
regulations.\38\ Companies' required public disclosure of payments in
an annual report is anticipated to begin in 2016 in all European Union
and EEA member states once the essential provisions have been
effectively incorporated into domestic law in each country.\39\
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\32\ Directive 2013/34/EU of the European Parliament and of the
Council of 26 June 2013 on the annual financial statements,
consolidated financial statements and related reports of certain
types of undertakings (``EU Accounting Directive''); and Directive
2013/50/EU of the European Parliament and of the Council of 22
October 2013 amending Directive 2004/109/EC on transparency
requirements in relation to information about issuers whose
securities are admitted to trading on a regulated market, Directive
2003/71/EC of the European Parliament and of the Council on the
prospectus to be published when securities are offered to the public
or admitted to trading and Commission Directive 2007/14/EC on the
implementation of certain provisions of Directive 2004/109/EC (the
``EU Transparency Directive'').
\33\ Unlike the 2012 Rules and the proposed rules, the EU
Directives also apply to companies active in the logging of primary
forests.
\34\ See Article 3(4) of the EU Accounting Directive, which
defines large companies (``large undertakings'') to mean those which
on their balance sheet dates exceed at least two of the three
following criteria: (a) Balance sheet totaling [euro]20 million
(approximately $21.4 million (USD) as of Nov. 10, 2015); (b) net
turnover of [euro]40 million (approximately $42.8 million (USD) as
of Nov. 10, 2015); and (c) average number of employees of 250.
Neither the 2012 rules nor the proposed rules have a size
limitation.
\35\ The EEA is composed of the EU Member states plus Iceland,
Liechtenstein and Norway.
\36\ The term ``regulated market'' is defined in the EU's
Markets in Financial Instruments Directive 2004/39/EC (``MiFID''),
as amended by 2010/78/EU. The list of regulated markets can be found
on the European Securities and Markets Authority's Web site at
http://mifiddatabase.esma.europa.eu/Index.aspx?sectionlinks_id=23&language=0&pageName=REGULATED_MARKETS_Display&subsection_id=0&action=Go&ds=8&ms=9&ys=2015&mic_code=MIC%20Code&full_name=Full%20Name&cpage=0 (last visited Dec. 8, 2015).
\37\ See EU Transparency Directive, Art. 2(1)(d) and Art. 6.
\38\ See, e.g., Article 45 of the EU Accounting Directive (``The
report . . . on payments to governments shall be published as laid
down by the laws of each Member State . . . .''); Id. at Article 51
(``Member States shall provide for penalties applicable to
infringements of the national provisions adopted in accordance with
this Directive . . . .'').
\39\ The requirements of the EU Directives are implemented
through the enacting legislation of each EU Member State. The
deadlines for implementing the EU Accounting Directive and the EU
Transparency Directive are July 20, 2015 and November 26, 2015
respectively. In general, non-EU EEA countries enact implementing
legislation after an EU Directive is adopted into the EEA by Joint
Committee decision. The EEA Joint Committee adopted the Accounting
Directive on October 30, 2015 and the Transparency Directive is
awaiting decision (as of November [6], 2015). As of November [6],
2015, Austria, Croatia, the Czech Republic, Denmark, Germany,
Hungary, Italy, Lithuania, Portugal, Slovakia, Spain, and the United
Kingdom have filed notifications of full transposition of the
Accounting Directive with the European Commission. Norway, a non-EU
member of the EEA, has adopted legislation that complies with both
the Accounting and Transparency Directives, effective for fiscal
years beginning on or after January 1, 2014. Other EU and EEA member
countries are working towards implementation.
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The EU Directives are similar to the 2012 Rules in that they
require disclosure of the same payment types on a per project and per
government basis and do not provide any exemption from the disclosure
requirements. Further, each of these regulations also requires public
disclosure of payment information, including the issuer's identity.
There are, however, significant differences from the 2012 Rules. One
difference is that the EU Directives define the term ``project,'' \40\
whereas the 2012 Rules left this term undefined.\41\ Another difference
is that the EU Directives allow issuers to use reports prepared for
foreign regulatory purposes to satisfy their disclosure obligations
under EU law if those reports are deemed equivalent pursuant to
specified criteria while the 2012 Rules do not contain such a
provision.\42\
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\40\ See, e.g., Article 41(4) of the EU Accounting Directive.
\41\ The Commission did not define the term ``project'' in the
2012 Rules, but it did provide guidance on its meaning in the 2012
Adopting Release, stating 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, 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'.'' 2012 Adopting Release at
85-86 [77 FR 56385].
\42\ See, e.g., Article 46-7 of the EU Accounting Directive.
Another significant difference is that the EU Directives cover
logging activities in addition to the extractive industry. See,
e.g., Article 42(1) of the EU Accounting Directive (``Member States
shall require . . . entities active in the extractive industry or
the logging of primary forests to prepare and make public a report
on payments made to governments on an annual basis.'').
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Canada also has adopted a federal resource extraction disclosure
law, the Extractive Sector Transparency Measures Act (``ESTMA''), which
is similar to the 2012 Rules.\43\ ESTMA, like the EU Directives, allows
for the Minister of Natural Resources Canada to determine that the
requirements of another jurisdiction are an acceptable substitute for
the domestic requirements.\44\ For example, on July 31, 2015 the
Minister determined that the reporting requirements in the EU
Directives were an acceptable substitute for Canada's requirements
under ESTMA.\45\ The draft guidance and technical reporting
specifications under ESTMA also include project-level reporting using
the same definition as the EU Directives.\46\ Unlike the EU Directives
and the 2012 Rules, which did not provide for any exemptions unique to
resource extraction payment disclosure, ESTMA authorizes the adoption
of regulations respecting, among other matters, ``the circumstances in
which any provisions of this Act do not apply to entities, payments or
payees.'' \47\ As of the date of this release, the Minister of Natural
Resources Canada has not authorized any regulations pursuant to that
provision that provide for exemptions under ESTMA.
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\43\ See Extractive Sector Transparency Measures Act, 2014 S.C.,
ch. 39, s. 376 (Can.), which came into force on June 1, 2015.
\44\ See ESTMA, Section 10(1) (``If, in the Minister's opinion,
and taking into account any additional conditions that he or she may
impose, the payment reporting requirements of another jurisdiction
achieve the purposes of the reporting requirements under this Act,
the Minister may determine that the requirements of the other
jurisdiction are an acceptable substitute . . . .'').
\45\ Extractive Sector Transparency Measures Act--Substitution
Determination, available at http://www..gc.ca/acts-regulations/17754
(last visited Dec. 8, 2015).
\46\ See draft Extractive Sector Transparency Measures Act--
Guidance (``ESTMA Guidance''). The Minister of Natural Resources of
Canada has recommended the adoption of a definition of project that
is identical to the EU Directives' definition of project. See
Natural Resources Canada, Extractive Sector Transparency Measures
Act-Technical Reporting Specifications, Sec. 2.2.2 (Aug. 1, 2015),
available at http://www.nrcan.gc.ca/sites/.nrcan.gc.ca/files/pdf/estma/Technical_Reporting_Specifications_EN.pdf. Although the ESTMA
Guidance is currently in draft form, we assume for purposes of this
proposal that it and the related draft ESTMA--Technical Reporting
Specifications (``ESTMA Specifications'') will be finalized in
substantially similar form prior to the effective date of our final
rules under Section 13(q). We will continue to evaluate any
developments in the ESTMA Guidance, ESTMA Specifications, and their
impact on our approach prior to the adoption of our final rules.
\47\ See ESTMA, Section 23(1).
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In addition to the developments in the European Union and Canada,
which govern a large percentage of the companies that would be impacted
by
[[Page 80062]]
our proposed rules,\48\ there have been significant developments in the
EITI's approach since the 2012 Rules. In the 2012 Adopting Release, we
noted that the EITI's approach at the time was fundamentally different
from Section 13(q) in that companies would generally submit payment
information confidentially to an independent administrator selected by
the country's multi-stakeholder group who then used that information to
produce a report.\49\ That report could have presented aggregated data
if the multi-stakeholder group approved of such presentation. Since
then, in order to elicit more intelligible, comprehensive, reliable,
and accurate information,\50\ the EITI has revised its standard to
require the report to include payment disclosure by each company,
rather than aggregated data, and project level disclosure if consistent
with the EU and Commission rules.\51\
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\48\ See Section III.B.2.b below for our estimate of the number
of companies that would be fully affected by the proposed rules.
\49\ See 2012 Adopting Release, n.27 and accompanying text.
\50\ See History of EITI (``The Board undertook an extensive
strategy review to address . . . [h]ow to ensure that the EITI
provided more intelligible, comprehensive and reliable information .
. . . The resulting EITI Standard . . . therefore sought . . .
[b]etter and more accurate disclosure . . . .'') available at
https://eiti.org/eiti/history (last visited Dec. 8, 2015).
\51\ See EITI Standard, at 6, 31.
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Since the 2012 Rules were vacated, numerous parties have also
submitted comment letters to the Commission and have met with members
of the Commission or the staff.\52\ These commenters provided
recommendations on how the Commission could structure the rules
required by Section 13(q) in light of the U.S. District Court for the
District of Columbia's decision and the international developments
described above. Through this process, the Commission also has become
aware that a number of extractive industry companies around the world
have voluntarily undertaken to make detailed disclosures of their
resource extraction payments to foreign governments.\53\ We have
reviewed and considered the comments received and the rules we are
proposing reflect such consideration.
---------------------------------------------------------------------------
\52\ Copies of the letters and meeting memoranda relating to
these matters are available at http://www.sec.gov/comments/df-title-xv/resource-extraction-issuers/resource-extraction-issuers.shtml.
\53\ See, e.g., letters from Kosmos Energy (Oct. 19, 2015)
(``Kosmos''); Statoil ASA (Feb. 22, 2011) (``Statoil''); and
Columbia Center on Sustainable Investment (Oct. 30, 2015). See also
BHP Billiton, Economic Contribution and Payments to Governments
Report 2015 available at http://www.bhpbilliton.com/~/media/bhp/
documents/investors/annual-reports/2015/
bhpbillitoneconomics2015.pdf?la=en.
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D. Summary of Proposed Rules
In general, the proposed rules, which are described in more detail
in Part II below, would require resource extraction issuers to file a
Form SD on an annual basis that includes information about payments
related to the commercial development of oil, natural gas, or minerals
that are made to governments. The following are the key provisions of
the proposed rules:
The term ``resource extraction issuer'' would apply to all
U.S. companies and foreign companies that are required to file annual
reports pursuant to Section 13 or 15(d) of the Exchange Act and are
engaged in the commercial development of oil, natural gas, or minerals.
The term ``commercial development of oil, natural gas, or
minerals'' would mean exploration, extraction, processing, and export,
or the acquisition of a license for any such activity, consistent with
Section 13(q).
The term ``payment'' would mean payments that are made to
further the commercial development of oil, natural gas, or minerals,
are ``not de minimis,'' and includes taxes, royalties, fees (including
license fees), production entitlements, and bonuses, consistent with
Section 13(q). We also propose including dividends and payments for
infrastructure improvements in the definition. In addition, we propose
defining ``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.
In addition to the payments it makes directly, a resource
extraction issuer would be required to disclose payments made by its
subsidiaries and other entities under its control. An issuer would
disclose those payments that are included in its consolidated financial
statements made by entities that are consolidated or proportionately
consolidated, as determined by applicable accounting principles.
The term ``project'' would be defined. We propose to
define it in a manner similar to the EU Directives, using an approach
focused on the legal agreement that forms the basis for payment
liabilities with a government. In certain circumstances this definition
would also include operational activities governed by multiple legal
agreements.
The term ``foreign government'' would mean 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, consistent with
Section 13(q).
The term ``Federal Government'' would mean the United
States Federal Government.
The proposed rules would require a resource extraction
issuer to file its payment disclosure on Form SD, on the Commission's
Electronic Data Gathering, Analysis, and Retrieval System (``EDGAR''),
no later than 150 days after the end of its fiscal year. Form SD would
require issuers to include a brief statement directing users to
detailed payment information provided in an exhibit.
Recognizing the discretion granted to us under Section
13(q), the proposed rules would require issuers to disclose the payment
information publicly, including the identity of the issuer.
The proposed rules would not include any express
exemptions. Instead, resource extraction issuers could apply for, and
the Commission would consider, exemptive relief on a case-by-case
basis.\54\
---------------------------------------------------------------------------
\54\ See Sections 12(h) and 36(a) of the Exchange Act (15 U.S.C.
78l(h) and 78mm(a)).
---------------------------------------------------------------------------
In light of recent developments in the European Union and
Canada, as well as the developments with the U.S. Extractive Industries
Transparency Initiative (``USEITI''), Form SD would include a provision
by which resource extraction issuers could use a report prepared for
foreign regulatory purposes or for USEITI to comply with the proposed
rules if the Commission deems the foreign jurisdiction's applicable
requirements or the USEITI reporting regime to be substantially similar
to our own.
Resource extraction issuers would be required to present
the payment disclosure using the eXtensible Business Reporting Language
(``XBRL'') electronic format and the electronic tags identified in Item
2.01 of Form SD. These tags would include those listed in Section
13(q), as well as tags for the type and total amount of payments made
for each project, the type and total amount of payments made to each
government, the particular resource that is the subject of commercial
development, and the subnational geographic location of the project.
Resource extraction issuers generally would be required to
comply with the rules starting with their fiscal year ending no earlier
than one year after the effective date of the adopted rules.
[[Page 80063]]
E. Objectives of Section 13(q)'s Required Disclosures and the Proposed
Rules
Section 13(q) reflects U.S. foreign policy interests in supporting
global efforts to improve the transparency of payments made in the
extractive industries. The use of securities law disclosure
requirements to advance foreign policy objectives is uncommon, and
therefore foreign policy is not a topic we routinely address in our
rulemaking.\55\ Nonetheless, because Congress has directed the
Commission to issue rules effectuating Section 13(q), we have sought to
understand the governmental interests that the statute and rules are
designed to serve, and to determine the best way to structure our rules
so as to further those governmental interests.
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\55\ In this regard, we note that there are only two other
Federal securities law disclosure requirements that appear designed
primarily to advance U.S. foreign policy objectives. The first is
Section 13(p) of the Exchange Act [15 U.S.CM 78m(p)], which was
added in 2010 by the Act. Section 13(p) directs the Commission to
adopt rules requiring certain disclosures regarding the use of
conflict minerals originating in the Democratic Republic of the
Congo. The other disclosure provision is Section 13(r) of the
Exchange Act [15 U.S.C. 78m(r)], which was added by the Iran Threat
Reduction and Syria Human Rights Act of 2012. Section 13(r) is a
self-executing provision that requires a reporting company to
include in its annual and quarterly reports disclosure about
specified Iran-related activities, and transactions or dealings with
persons whose property and interests are blocked pursuant to two
Executive Orders relating to terrorism and the proliferation of
weapons of mass destruction. Public Law 112-158 (Aug. 10, 2012).
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Accordingly, we have carefully examined the legislative history,
relevant materials from the Executive Branch, and the many comments we
have received, in order to develop our understanding of the objectives
of Section 13(q). To assist us further in understanding the
governmental interests, Commission staff consulted with relevant staff
from the Department of State, the Department of the Interior, and the
U.S. Agency for International Development.\56\ Commission staff also
conferred with representatives from the Canadian and British
governments, as well as a representative of the European Union. As
outlined below, these sources and consultations have helped form our
view that Section 13(q) and the rules required thereunder are intended
to advance the important U.S. foreign policy objective of combatting
global corruption and, in so doing, to potentially improve
accountability and governance in resource-rich countries around the
world.\57\ In light of our understanding, the disclosure that we are
proposing to require of resource extraction issuers (i.e., company
specific, project-level, public disclosure of information relating to
payments made to a foreign government for the purpose of the commercial
development of oil, natural gas, or minerals) is designed to further
these critical U.S. interests.
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\56\ See Section 13(q)(2)(B) (expressly authorizing the
Commission in developing the rules under Section 13(q) to ``consult
with any agency or entity that the Commission determines is
relevant'').
\57\ See, e.g., letters from United States Department of State
(Nov. 13, 2015) (``State Department'') (``[Section 13(q)] directly
advances the United States' foreign policy interests in increasing
transparency and reducing corruption in the oil, gas, and mineral
sectors.''); DOI 1.
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1. The U.S. Government's Foreign Policy Interest in Reducing Corruption
in Resource-Rich Countries
An important component of the U.S. foreign policy agenda is ``to
stem corruption around the world and hold to account those who exploit
the public's trust for private gain.'' \58\ Indeed, ``[t]he United
States has been a global leader on anti-corruption efforts since
enacting the first foreign bribery law, the Foreign Corrupt Practices
Act (FCPA), in 1977.'' \59\ For example, ``[t]he United States was a
leader in developing fundamental international legal frameworks [to
combat corruption] such as the UN Convention against Corruption and the
Organization for Economic Cooperation and Development (OECD) Anti-
Bribery Convention[.]'' \60\ And ``[t]he United States has also been a
leader in providing funding for capacity building to fight corruption
and promote good governance.'' \61\
---------------------------------------------------------------------------
\58\ The White House, Fact Sheet: The U.S. Global Anticorruption
Agenda (Sept. 24, 2014) (``White House Fact Sheet'') available at
https://www.whitehouse.gov/the-press-office/2014/09/24/fact-sheet-us-global-anticorruption-agenda (``Preventing corruption preserves
funds for public revenue and thereby helps drive development and
economic growth. By contrast, pervasive corruption siphons revenue
away from the public budget and undermines the rule of law and the
confidence of citizens in their governments, facilitates human
rights abuses and organized crime, empowers authoritarian rulers,
and can threaten the stability of entire regions.''). See also
letter from State Department (``Efforts to promote transparency and
good governance, and combat corruption are at the forefront of the
[State] Department's diplomatic and development efforts.'').
\59\ White House Fact Sheet. See also Press Statement, Secretary
of State John Kerry, U.S. Welcomes International Anticorruption Day
(Dec. 9, 2014) (``Kerry Statement'') available at http://www.state.gov/secretary/remarks/2014/12/234873.htm (``[T]he United
States is using a variety of tools, including bilateral diplomacy,
multilateral engagement, enforcement, and capacity building
assistance, to advance our anticorruption agenda.''); Secretary of
State Hillary Rodham Clinton, Speech at the Transparency
International-USA's Annual Integrity Award Dinner (Mar. 22, 2012)
(``Clinton Transparency Speech'') (describing how the United States
has ``made it a priority to fight corruption and promote
transparency'').
\60\ White House Fact Sheet. See generally OECD Convention on
Combating Bribery of Foreign Public Officials in International
Business Transactions (Dec. 17, 1997) available at http://www.oecd.org/daf/anti-bribery/ConvCombatBribery_ENG.pdf.
\61\ White House Fact Sheet. See also Kerry Statement (``[W]e
renew our notice to kleptocrats around the world: Continued theft
from your communities will not be tolerated . . . .''); Clinton
Transparency Speech (stating that ``[c]orruption is a key focus of
our strategic dialogue with civil society''); Staff of Senate
Committee on Foreign Relations, 110th Cong., The Petroleum and
Poverty Paradox, at 17 (Oct. 2008) (``Senate Report'') (``One of the
five `key objectives' of U.S. foreign assistance is to ensure that
recipient countries are `governing justly and democratically,' which
for developing countries means that foreign aid is directed to
`support policies and programs that accelerate and strengthen public
institutions and the creation of a more vibrant local government,
civil society, and media.''). See generally The White House, Fact
Sheet: Leading the Fight Against Corruption and Bribery (Nov. 11,
2014) available at https://www.whitehouse.gov/the-press-office/2014/11/11/fact-sheet-leading-fight-against-corruption-and-bribery)
(``The United States continues to lead in providing funding for
capacity building to fight corruption and promote good
governance.'').
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One area of particular concern for the U.S. Government is
corruption within the governments of developing countries that are rich
in oil, gas, or minerals.\62\ Indeed, it has been explained that
``[h]igher levels of corruption present the most obvious political risk
that can arise from large holdings of natural resources. The short run
availability of large financial assets [i.e., revenues from natural
resources] increases the opportunity for the theft of such assets by
political leaders.'' \63\
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\62\ See, e.g., White House Fact Sheet (explaining that ``the
United States is taking several actions to ensure that extractives
companies and governments remain accountable''); letter from State
Department (``Efforts to increase transparency have been a high
priority for this Administration as part of the United States' good
governance promotion, anti-corruption, and energy security
strategies.''). See also Testimony of Secretary Hillary Rodham
Clinton, Senate Foreign Relations Committee Hearing on National
Security and Foreign Policy Priorities in the FY 2013 International
Affairs Budget (Feb. 28, 2012) (explaining that ``everybody is
benefited by the disinfectant of sunshine and the spotlight to hold
institutions accountable'' and the Section 13(q) disclosures
``complement[] other efforts at transparency that [the U.S.
Government is] committed to''); Senate Report, at 17 (``[I]n the
summer of 2008, the State Department, under a provision of the
FY2008 State appropriations bill, issued new guidance to embassies
to revoke or deny visas to high-level foreign officials involved in
extractive industries corruption.'').
\63\ Maccartan Humphreys, Jeffrey D. Sachs & Joseph E. Stiglitz,
Escaping the Resource Curse (2007), at 11 (``Escaping the Resource
Curse''). See also, Simon Dietz, Eric Neumayer, & Indra de Soysa,
Corruption, the Resource Curse, and Genuine Saving, Environment
Development Economics (2007) (noting that ``[t]he availability of
resource rents may give rise to corruption''). See generally Senate
Report, at 12 (explaining that ``transparency in extractive
industries abroad is in [U.S.] interests because mineral wealth
breeds corruption, which dulls the effects of U.S. foreign
assistance''); Escaping the Resource Curse, at 11 (noting that
``statistical studies that seek to account for variation in levels
of corruption across different countries find that natural resource
dependence is a strong predictor''); Global Witness, Oil Revenue
Transparency (Mar. 2007) (``In all, 26 of the world's 36 oil-rich
countries rank among the bottom half of the world's most corrupt
countries.''); letter from Civil Society Coalition on Oil and Gas in
Uganda (May 18, 2015) (``CSCU'') (explaining that revenues from
extractive activities are a ``major vector for corruption and
malfeasance in the extractive sectors'').
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[[Page 80064]]
The costs of such corruption to the national economies of these
resource-rich developing countries can be ``enormous.'' \64\ Many
experts and policymakers in this area contend that such corruption ``is
central to explaining why resource-rich countries perform badly in
terms of socio-economic development, a phenomenon that has been termed
the resource curse.'' \65\ The State Department has similarly explained
that ``[c]orruption and mismanagement of these resources can impede
economic growth, reduce opportunities for U.S. trade and investment,
divert critically needed funding from social services and other
government activities, and contribute to instability and conflict.''
\66\ Whatever form the relationship between corruption and the resource
curse may take in a given resource-rich developing country, many
believe that the two are closely connected.\67\
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\64\ Escaping the Resource Curse, at 11.
\65\ Ivar Kolstad and Arne Wiig, Is Transparency the Key to
Reducing Corruption in Resource Rich Countries? World Development
(Feb. 2009). See also, Simon Dietz, Eric Neumayer, & Indra de Soysa,
Corruption, the Resource Curse, and Genuine Saving, Environment
Development Economics (2007) (discussing the ``persuasive
theoretical and empirical arguments in the literature that suggest
corruption may be a major explanatory factor in the resource
curse''); Carles Leite & Jens Weidmann, Does Mother Nature Corrupt?
Natural Resources, Corruption, and Economic Growth, IMF (July 1999)
(discussing a regression analysis demonstrating that ``long-term
growth is negatively affected by the level of corruption''); Senate
Report, at 10 (``The resource curse is the product of multiple
factors including . . . [i]ncreases in incentives for corruption and
political rent-seeking when large commodity revenue streams are
available[.]''). See generally Escaping the Resource Curse, at 1
(``Countries with large endowments of natural resources, such as oil
and gas, often perform worse in terms of economic development and
good governance than do countries with fewer resources.
Paradoxically, despite the prospects of wealth and opportunity that
accompany the discovery and extraction of oil and other natural
resources, such endowments all too often impede rather than further
balanced and sustainable development.'') (emphasis in original);
Bank Information Center & Global Witness, Assessment of IMF and
World Bank Group Extractive Industries Transparency Implementation
(Oct. 2008) (``[M]any resource-rich countries are among the most
corrupt and the poorest countries in the world.'').
\66\ Letter from State Department.
\67\ At least one potential explanation for the relationship
between resource-revenue corruption and poor socio-economic
performance is that resource revenues tend to ``produce weak state
structures that make corrupt practices considerably easier for
government officials.'' Escaping the Resource Curse, at 11. The weak
state structures, in turn, may result from the fact that ``resource-
rich governments receive so much revenue from rents that they have
little need for taxation'' and, therefore, can operate in a manner
that is less accountable to the general public. Caitlin C. Corrigan,
Breaking the Resource Curse: Transparency in the Natural Resource
Sector and the Extractive Industries Transparency Initiative,
Resource Policy (2014). It has been argued that ``[s]uch governments
have lower motivation to push through development enhancing
proposals or remain democratic.'' Id. See generally Escaping the
Resource Curse, at 257 (``Simply stated, petroleum dependence turns
oil states into `honey pots'--ones to be raided by all actors,
foreign and domestic, regardless of the long-term consequences
produced by this collective rent-seeking.'').
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In recent years, a global consensus has begun to emerge that
increasing revenue transparency through the public disclosure of
revenue payments made by companies in the resource extraction sector to
foreign governments can be an important tool to help combat the
corruption that resource-rich developing countries too often
experience.\68\ For example, as discussed above, since 2002 an
international coalition that includes various foreign governments,
international organizations, and resource extraction issuers has
maintained the EITI, which seeks to improve public transparency and
accountability in countries rich in oil, natural gas, or minerals.\69\
As also discussed above, the European Union and Canada have both
enacted resource extraction payment disclosure requirements.\70\
Moreover, the World Bank requires ``revenue transparency as a condition
on new investments in [extractive industries].'' \71\ The International
Monetary Fund similarly seeks to promote such transparency in
developing countries.\72\
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\68\ See, e.g., letter from State Department (explaining that
transparency has been ``widely identified as a key component of the
fight against corruption in this sector''); Liz David-Barrett & Ken
Okamura, The Transparency Paradox: Why Do Corrupt Countries Join
EITI? Working Paper No. 38, European Research Centre for Anti-
Corruption and State-Building (Nov. 2013) (explaining that
transparency initiatives ``have become a key part of the anti-
corruption toolkit on the assumption that sunlight is the best
disinfectant''); Alexandra Gillies & Antoine Heuty, Does
Transparency Work? The Challenges of Measurement and Effectiveness
in Resource-Rich Countries, 6 Yale J. Int'l Aff. 25 (2011)
(``Transparency has emerged as the most broadly recommended policy
response to poor governance records in resource-rich states and
their damaging developmental effects.''). See also Escaping the
Resource Curse, at 26 (``The central problem facing resource-rich
countries may be easily stated: Various individuals wish to divert
as much of that endowment as possible for their own private benefit.
Modern economic theory has analyzed the generic problem of inducing
agents (here government officials) to act in the interests of those
they are supposed to serve (the principals, here the citizens more
generally). Agency problems arise whenever information is imperfect,
and hence there is a need to emphasize transparency, or improving
the openness and availability of information in an attempt to
control corruption.'') (emphasis in original).
\69\ See Senate Report, at 14 (describing as ``[k]ey EITI
goals'' the ``prevent[ion] [of] revenue-related corruption'' and the
``promotion [of] public fiscal transparency and political
accountability'').
\70\ Another example of an international transparency effort is
the amendments to the Hong Kong Stock Exchange listing rules for
mineral 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).
\71\ World Bank, Striking a Better Balance--the World Bank Group
and Extractive Industries: The Final Report of the Extractive
Industries Review (Sept. 17, 2004).
\72\ See IMF, Guide on Resource Revenue Transparency (2007) (``A
high immediate priority should be given to improving the quality and
public disclosure of data on resource revenue transactions . . .
.The public availability of information on all resource-related
transactions is central to fiscal transparency.''). See generally
Senate Report, at 3 (``The World Bank and the International Monetary
Fund have both launched efforts to improve accounting and
transparency of extractive industry revenues, and to make it harder
for government officials to hide corruption--and easier for citizens
to demand that the money be spent wisely.'').
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In accordance both with the U.S. Government's long-standing foreign
policy objective to reduce global corruption and with the increased
appreciation that resource extraction payment transparency may help
combat corruption, Congress in 2010 enacted the Section 13(q) public
disclosure requirement.\73\ Section 13(q) directly
[[Page 80065]]
embodies this governmental purpose, providing expressly that ``[t]o the
extent practicable, the rules issued [under the provision] shall
support the commitment of the Federal Government to international
transparency promotion efforts relating to the commercial development
of oil, natural gas, or minerals.'' \74\ The legislative history
underlying the enactment of Section 13(q) further confirms that the
provision was intended to help combat corruption by increasing public
transparency of resource extraction payments and, in so doing, to
potentially enhance accountability and governance in resource-rich
developing countries.\75\ And since the enactment of Section 13(q), the
President and the State Department have emphasized the important role
that disclosure pursuant to Section 13(q) is intended to have in
helping to combat corruption in resource-rich countries.\76\
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\73\ The legislative history demonstrates that, by at least
2008, Congress became aware that a mandatory disclosure regime was
needed to complement the voluntary EITI regime to achieve
significant international gains in payment transparency. See, e.g.,
Transparency of Extractive Industries: High Stakes for Resource-Rich
Countries, Citizens, and International Business, Hearing before the
Committee on Financial Services, U.S. House of Representatives (No.
110-75) (Oct. 25, 2007) at 7 (testimony of Ian Gary) (``EITI may
make progress in some countries where political will to tackle the
problem is strong and lasting, and requires the active involvement
of civil society. But the initiative is weakened by its voluntary
nature and will not capture many countries where problems are most
severe.''). As explained in a 2008 Senate Foreign Relations
Committee report:
United States and multilateral efforts to promote extractive
industries transparency are intended to work within the bounds of
the political will and technical capacity of the resource-rich
countries. With their revenue windfall, some of these nations are
increasingly intransigent in resisting outside pressure. This has
led some to urge that the U.S. should take steps domestically to
promote transparency overseas, much as the Foreign Corrupt Practices
Act was U.S. domestic legislation to thwart corruption abroad. One
such proposal is to mandate revenue reporting for companies listed
with the Securities and Exchange Commission and working in
extractives abroad.
Senate Report, at 20. This report's findings served as the basis
for Section 13(q). See 156 Cong. Rec. S3816 (May 17, 2010)
(Statement of Senator Lugar) (explaining that Section 13(q) ``builds
on the findings'' of this report); id. at S3817 (May 17, 2010)
(Statement of Senator Dodd). See also id. S3818 (May 17, 2010)
(Statement of Senator Dodd) (stating that ``broad new requirements
for greater disclosure by resource extractive companies operating
around the world[ ] would be an important step'' to complement the
EITI's ``voluntary program'').
\74\ Section 13(q)(2)(E).
\75\ See, e.g., 156 Cong. Rec. S3816 (May 17, 2010) (Statement
of Senator Lugar) (explaining that the provision will help combat
the problem where ``[t]oo often, oil money intended for a nation's
poor ends up lining the pockets of the rich or is squandered on
showcase projects instead of productive investments''); id. at S3976
(May 19, 2010) (Statement of Senator Feingold) (explaining that the
provision will ``require companies listed on U.S. stock exchanges to
disclose in their SEC filing extractive payments made to foreign
governments for oil, gas, and mining . . . . This information would
then be made public, empowering citizens in resource-rich countries
in their efforts to combat corruption and hold their governments
accountable.''); id. at S5913 (July 15, 2010) (Statement of Senator
Leahy) (``[Section 13(q)] will enable citizens of these resource-
rich countries to know what their governments and governmental
officials are receiving from foreign companies in exchange for
mining rights. This will begin to hold governments accountable for
how those funds are used and help ensure that the sale of their
countries' natural resources are used for the public good.''). We
note that the legislative history also indicates that Congress
intended for the Section 13(q) disclosures to serve as a potential
informational tool for investors. See, e.g., id. at 3316 (Statement
of Senator Cardin) (May 6, 2010) (``The investor has a right to know
about the payments. Secrecy of payments carries real bottom-line
risks for investors.'').
\76\ See, e.g., President Barack Obama, Speech Before the United
Nations General Assembly (Sept. 22, 2010) (``So we are leading a
global effort to combat corruption, which in many places is the
single greatest barrier to prosperity, and which is a profound
violation of human rights. That's why we now require oil, gas and
mining companies that raise capital in the United States to disclose
all payments they make to foreign governments.''); letter from State
Department (recommending that the Commission ``produce a strong
[Section 13(q)] rule that improves transparency by ensuring a
sufficiently detailed level of information concerning payments from
the extractive industry to foreign governments for the development
of oil, natural gas, and mineral'' that would be ``made public and
accessible to civil society''); id. (``A strong [Section 13(q) rule
would complement [the U.S. Government's anti-corruption] efforts,
bolster our credibility with foreign partners on these issues, and
promote U.S. foreign policy interests. It is important the United
States lead by example by modeling strong transparency legislation
and rulemaking.''); Clinton Transparency Speech (stating that
Section 13(q) should ``have a very profound effect on [the U.S.
Government's] ability to try to manage some of the worst practices
that we see in the extractive industry and in the relationships with
governments at local and national levels around the world'').
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2. Reasons for Proposing Issuer-Specific, Project-Level, Public
Disclosures of Resource Extraction Payments
Given the important governmental interests underlying Section 13(q)
and this rulemaking, we have considered the manner in which the public
disclosure of resource extraction payments might best promote those
governmental interests. As detailed in Section II of this release, we
are proposing a requirement for company-specific, project-level, public
disclosure. By ``project-level'' reporting, we refer to ``project'' as
defined by our proposed rules--a definition that is generally based on
the operational activities that are governed by a single contract,
license, lease, concession or similar legal agreement and that forms
the basis for payment liabilities.\77\ We believe that such company-
specific, project-level payment transparency is potentially beneficial
and that our proposal to require such disclosure is properly designed
to further the goal of combatting corruption.
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\77\ See Section II.E below. Our definition is generally
comparable to the ``project'' definition that the European Union has
adopted and that Canada is considering adopting. We note that the
State Department has advised that a Commission rule ``compatible
with'' the EU and Canadian ``transparency measures would further
advance the United States' foreign policy interests.'' Letter from
State Department. Some commenters have argued for a much broader
definition of project that would encompass vast expanses of
territory in many instances, but as we explain immediately below and
in Section II.E, the more granular definition contained in the
proposed rules would provide greater payment transparency and better
serve the statutory objectives. See generally letter from Iraqi
Transparency Alliance for Extractive Industries (Sept. 28, 2015)
(``Iraqi Transparency Alliance'') (explaining that ``EITI data in
Iraq is reported by field, but some fields are enormous,'' such as
the ``Rumaila field--a super-giant oil field, covering around 700
[square miles], with around 270 production wells in operation,
producing around 1.3 m barrels per day,'' and stating that
``[w]ithout project-level information, [Iraqi citizens] cannot see
the detailed roles that individual companies are playing in the
region and whether Iraqi citizens are seeing the appropriate
benefits from the extraction'').
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Scholars and other experts have noted that ``[t]he extractive
sector presents particularly strong asymmetries of information across
the principal stakeholders: Citizens, governments, and companies.''
\78\ While resource extraction companies are aware of the payments that
they make and government actors may be aware of the revenues that they
receive, too often ``[t]he citizens of resource-rich countries have
very little information about the extractive industry-related
activities in which their government engages.'' \79\ This has been
described as ``a formula for corruption.'' \80\
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\78\ Alexandra Gillies & Antoine Heuty, Does Transparency Work?
The Challenges of Measurement and Effectiveness in Resource-Rich
Countries, 6 Yale J. Int'l Aff. 25 (2011). See also 156 CONG. REC.
S3817 (May 17, 2010) (Statement of Senator Dodd) (explaining that in
many resource-rich countries ``governance and accountability systems
are rudimentary, at best,'' and ``corruption, secrecy, and a lack of
transparency regarding public finance are pervasive''). See
generally Gillies & Heuty (``This uneven allocation [of information]
reflects the centralization of power and control of the petroleum
and mineral sectors that commonly occurs in developing
countries.'').
\79\ Escaping the Resource Curse, at xiv. See also Gillies &
Heuty (``Media, parliaments, civil society, the population,
opposition parties, and other outsiders often have very limited
access to information, which constrains their ability to exercise
their oversight and accountability functions.''). See also letters
from Iraqi Transparency Alliance (``While EITI data is certainly an
improvement upon what we had before . . . there are some serious
shortcomings [in that disclosure] that prevent civil society
organizations . . . from properly monitoring the flow of money in
our oil sector.''); Publish What You Pay--Zimbabwe (Feb. 20, 2015)
(``PWYP-ZIM'') (``Currently there is very little useful data
published by government or industry in Zimbabwe's extractives
sector.''); Global Witness (Dec. 18, 2013) (``Global Witness 2'')
(referring to insufficient disclosure by governments and industry
participants resulting in corruption among other things).
\80\ Escaping the Resource Curse, at 266. See generally Dilan
Olcer, OECD Working Paper No. 276, Extracting the Maximum from EITI
(Mar. 11, 2009) (describing the problem in terms of principal-agent
theory where the country's citizens are the principal and the
government officials are the agents: ``The agent does not faithfully
serve the interests of the principal because they have conflicting
interests and the actions of the agent are not observable by the
principal'') (emphasis added).
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The public disclosure of resource extraction payments that are made
to foreign governments can become an important step towards combatting
the information asymmetries that can foster corruption and a lack of
governmental accountability.\81\ This is in part because
[[Page 80066]]
``[i]mproved transparency in the transactions between governments and
extractive corporations means that there should be less room for hidden
---------------------------------------------------------------------------
or opaque behavior[.]'' \82\ As one academic article describes it:
\81\ See, e.g., letter from State Department (explaining that a
``sufficiently detailed level of information concerning payments
from the extractive industry to foreign governments for the
development of oil, natural gas, and minerals'' that is made
publicly available is necessary to achieve the anti-corruption and
transparency objectives and further explaining that ``[i]n the
absence of this level of transparency, citizens have fewer means to
hold their governments accountable, and accountability is a key
component of reducing the risk of corruption''); World Bank,
Striking a Better Balance--the World Bank Group and Extractive
Industries: The Final Report of the Extractive Industries Review
(Sept. 17, 2004) (describing revenue transparency as ``an important
step''). We note that the potential for communities and civil
society to reduce corruption and achieve greater governmental
accountability exists even where the governments at issue have
authoritarian tendencies. See also letter from ONE Campaign (Nov. 6,
2015) (``ONE Campaign'') (detailing various case studies involving
successful citizen actions taken in countries such as Angola,
Azerbaijan and Zimbabwe to ``demonstrate[e] that even in countries
with closed political systems and restricted civil liberties
citizens are still able to use information to drive change'').
\82\ Dilan Olcer, OECD Working Paper No. 276, Extracting the
Maximum from EITI (Mar. 11, 2009). See also 156 CONG. REC. S5872
(July 15, 2010) (Statement of Senator Cardin) (``By giving the
citizens the information about how payments are made to their
country, they have a much better chance to hold their government
officials accountable.''); Escaping the Resource Curse, at xiv
(``The obvious remedy is greater transparency and
accountability.''). See generally Global Witness, Oil Revenue
Transparency: A Strategic Component of U.S. Energy Security and
Anti-Corruption Policy (Mar. 2007) (``[E]nergy revenue transparency
limits the scope of oil-related corruption through fiscal
accountability.''); Caitlin C. Corrigan, Breaking the Resource
Curse: Transparency in the Natural Resources Sector and the
Extractive Industries Transparency Initiative, Resources Policy
(2014) (``Transparency and accountability within government is
expected to mitigate some of the negative economic and quality of
governance effects seen in countries with poor institutions and
abundant resources by making it harder for government to divert
revenues to corruption and patronage.'').
---------------------------------------------------------------------------
Information asymmetries facilitate rent-seeking behavior and
permit those in charge to utilize the country's resource wealth to
advance their personal and political aims. In such a context, where
informational asymmetries are key characteristics of power
differentials, transparency is both difficult and a potential agent
of change . . . Demystifying the extractive sector and financial
flows dilutes some of the center's power by enabling other actors to
participate more fully. It eliminates informational enclaves where
incentives favor self-interested behavior.\83\
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\83\ Alexandra Gillies & Antoine Heuty, Does Transparency Work?
The Challenges of Measurement and Effectiveness in Resource-Rich
Countries, 6 Yale J. Int'l Aff. 25 (2011). See also id.
(``Transparency should alter incentives as perceived by the
individual in charge by increasing the costs associated with `bad'
policies or behavior, such as signing an unfavorable contract in
exchange for a bribe or failing to property assess royalties. It
should also alter incentives by increasing external pressure for
decision makers to advance the broader national interest as
information empowers broader constituencies.''); Ivar Kolstad & Arne
Wiig, Is Transparency the Key to Reducing Corruption in Resource
Rich Countries? World Development (Feb. 2009) (``Transparency, or
access to information, can have an effect on corruption.
Transparency can reduce bureaucratic corruption by making corrupt
acts more risky . . . . Transparency can reduce political corruption
by helping make politicians more accountable to the public.''); Liz
David-Barrett & Ken Okamura, The Transparency Paradox: Why Do
Corrupt Countries Join EITI?, Working Paper No. 38, European
Research Centre for Anti-Corruption and State-Building (Nov. 2013)
(``A lack of transparency makes corruption less risky and more
attractive.''). See generally Escaping the Resource Curse, at 26
(``With the cost-benefit calculus for corruption changed, there
might be less corruption.'').
While public disclosure of information about resource extraction
payments to foreign governments should help reduce the information
asymmetries that allow corruption to occur, the question remains of
what form that disclosure should take to best reduce corruption
consistent with the statutory objectives. Having considered the public
comments received, information the staff learned from inter-agency
consultations, relevant academic literature, and other expert analyses
(as well as the mandatory disclosure regimes that have recently been
adopted by the European Union and Canada), we are proposing to require
company-specific, project-level, public disclosure of payment
information as the means best designed to advance the U.S. Government's
interests in reducing corruption and promoting accountability and good
governance.
An important consideration in support of detailed project-level
disclosure of the type proposed is that such disaggregated information
may help local communities and subnational governments combat
corruption by enabling them to verify that they are receiving the
resource extraction revenue allocations from their national government
that they may be entitled to under law.\84\ Several commenters made
this point. For example, a civil society group in Cameroon explained:
---------------------------------------------------------------------------
\84\ See, e.g., letter from National Advocacy Coalition on
Extractives (Feb. 10, 2015) (``NACE'') (``In order to calculate the
amount of money they are entitled to and hold [national] government
agencies to account for allocating the correct amount, communities
need access to project-level revenue data.'').
The Cameroonian Mining Code states that municipality and local
communities are entitled to 25 percent of the Ad Valorem tax and
Extraction tax paid by companies for the projects located in their
jurisdiction . . . . [W]ithout project-level fiscal data, local
populations will not be able to cross-check whether or not they are
receiving the share of revenues they are legally entitled to.\85\
---------------------------------------------------------------------------
\85\ Letter from Publish What You Pay Cameroon (June 8, 2015)
(``PWYP-CAM''). See also id. (``Unfortunately, insufficient
granularity is a serious flaw in Cameroon's EITI reports, as
companies report the total amount of money they are pay[ing] for all
projects in our country, combined.'') (emphasis in original).
A civil society group in Angola similarly represented that project-
level data would help ``ensur[e] [that] local communities receive their
entitlements from revenue sharing agreements[.]'' \86\ Project-level
disclosure could help reduce instances where government officials are
corruptly depriving subnational governments and local communities of
revenue allocations to which they are entitled.\87\
---------------------------------------------------------------------------
\86\ Letter from Open Society Institute for Southern Africa-
Angola (Jan. 29, 2015) (``OSISA-A''). See also id. (``[T]he Angolan
government is required by law to transfer 10 per cent of the taxes
generated by extraction projects in Cabinda directly to the
provincial government. The revenue is earmarked for spending on
local development initiatives in order to help offset some of the
social and environmental costs of oil production for local
communities. Similar oil revenue-sharing agreements exist in the
Angolan provinces of Zaire and Bengo.''); letter from ONE Campaign
(stating that in Burkina Faso mining companies are required to pay
1.0% of their revenues to local communities in which they operate in
order to help communities finance improvements in healthcare,
education, sanitation, and clean water and explaining that
``[a]ccess to project-level payment information will be crucial for
helping citizens to monitor that mining companies are paying 1% of
revenues to local communities and to hold the government accountable
for those funds'').
\87\ For example, a civil society group in Indonesia reports
that it is already using Indonesia's EITI reports--which apparently
now include project-level reporting--to ``[e]nsur[e] that local
governments and communities are properly compensated for the oil,
gas, and mining activity in their'' geographical areas. See Letter
from Publish What You Pay--Indonesia (Mar. 11, 2015) (``PWYP-IND'')
(``By law, local governments [in Indonesia] are to receive 15
percent of oil revenue generated by local projects, 30 percent of
gas revenue, and 80 percent of mineral royalties . . . . [D]istrict
governments and citizens inhabiting resource-rich areas can now
calculate the share of extractives revenue they are owed, and
confirm that it is delivered.''). We note that in an analogous area
such public disclosure has reduced corruption. See R. Reinikka & J.
Svensoon, Fighting Corruption to Improve Schooling: Evidence from a
Newspaper Campaign in Uganda, Journal of European Economic
Association (2005) (reporting that, following surveys in Uganda
showing that only 13% of education grants actually reached schools
in the 1990s (the rest being captured by local governments), the
Ugandan government started to publish monthly grants to districts in
newspapers; the study found that publication of the grants had a
substantial effect on preventing the corrupt diversion of the funds
such that, by 2001, more than 80% of grants on average reached
schools).
---------------------------------------------------------------------------
Company-specific, project-level, public data also may permit
citizens, civil society groups, and others to actively engage in the
monitoring of revenue flows in various other ways that may reduce
corruption and increase accountability.\88\ For example, project-
[[Page 80067]]
level reporting would potentially allow for comparisons of revenue
flows among different projects.\89\ The potential to engage in cross-
project revenue comparisons may allow citizens, civil society groups,
and others to identify potential payment discrepancies that reflect
corruption or other inappropriate financial discounts.\90\
---------------------------------------------------------------------------
\88\ See generally Liz David-Barrett & Ken Okamura, The
Transparency Paradox: Why Do Corrupt Countries Join EITI?, Working
Paper No. 38, European Research Centre for Anti-Corruption and
State-Building (Nov. 2013) (``[P]roviding highly aggregated
macroeconomic figures on oil revenues or expenditures is likely to
result in collective action problems, where individual incentives to
act on the information are weak.''); Bank Information Center &
Global Witness, Assessment of IMF and World Bank Group Extractive
Industries Transparency Implementation (Oct. 2008) (``Local groups
working on [extractive industry] transparency issues insist that
project-level disclosure is necessary to carrying out meaningful
tracking of revenue flows from extractive industries, especially
important to local communities.''); letters from Iraqi Transparency
Alliance (``[C]itizens most impacted by extraction--such as
communities located near extraction sites--will require project-
level data in order to determine whether they are receiving a fair
share of services from their provincial governments. For example, a
villager located near an extraction site might draw on project level
data to discover that her provincial government is generating huge
sums of money from a nearby project, yet providing relatively paltry
services to the affected village. In such a case, project level
payment information could be used to effectively lobby the
provincial government for additional expenditures.''); and
Transparency International-USA (Dec. 8, 2015) (stating that project-
level disclosure ``will allow anti-corruption groups to identify
corruption and hold governments and companies to account'').
\89\ See, e.g., letters from PWYP-ZIM (``Project-level reporting
would also allow for some comparison along projects at similar
levels of maturation.''); CSCU (``[I]f revenue data is not
disaggregated by company, it will not aid our understanding of the
deals negotiated, and variations in payments made, by different
companies.'').
\90\ See generally letter from CSCU (``Only payment data that is
company-specific would enable us to call on both companies and the
Government to explain any substantial variations among different
companies, and ensure that individual firms are not improperly
obtaining fiscal benefits.'').
---------------------------------------------------------------------------
Furthermore, to the extent that a company's specific contractual or
legal obligations to make resource extraction payments to a foreign
government are known (or are discoverable), company-specific, project-
level disclosure may help assist citizens, civil society groups, and
others ``to monitor individual company's contributions to the public
finances and ensure firms are meeting their payment obligations.'' \91\
Such data may also help various actors ensure that the government ``is
properly collecting and accounting for payments.'' \92\ Relatedly, an
important additional benefit of company-specific and project-level
transparency ``is that it would also act as a strong deterrent to
companies underpaying royalties'' or other monies owed.\93\
---------------------------------------------------------------------------
\91\ Letter from CSCU. See also letter from ONE Campaign
(describing how EITI disclosures in Liberia enabled civil society
groups to discover that a mining company had fraudulently failed to
pay over $100,000 to the government and to compel the company to
make the required payment).
\92\ Id. See also id. (``[CSCU] is planning to use project- and
company-level data . . . in conjunction with a new contract modeling
tool developed by the U.K. NGO Global Witness, which allows citizens
to use publicly available contracts to predict how much revenue a
government will receive from that contract. We will check project-
level payment data disclosed by companies against the model's
predictions to analyze and raise questions about any discrepancies
between reported payments from modeled predictions.''). See
generally Dilan Olcer, OECD Working Paper No. 276, Extracting the
Maximum from EITI (Mar. 11, 2009) (discussing the earlier version of
the EITI which did not require project-level disclosure and
explaining that ``disaggregated data'' is needed to ``ensure the
level of transparency that is necessary to enable scrutiny by
outsiders'').
\93\ Letter from CSCU.
---------------------------------------------------------------------------
Additionally, we note that various commenters have asserted that
``[p]roject-level reporting in particular will help communities and
civil society [groups] to weigh the costs and benefits of an individual
project.'' \94\ Where the net benefits of a project are small or non-
existent, this may be an indication that the foreign government's
decision to authorize the project is based on corruption or other
inappropriate motivations.\95\
---------------------------------------------------------------------------
\94\ Letter from PWYP-ZIM (``If, however, payments cannot be
linked to a company or project, it will be impossible to carry out a
full assessment of their impact.''). See also letters from Robert F.
Conrad, Ph.D. (July 17, 2015) (``[P]roject level reporting is
necessary for resource owners, whom I define as the citizens of most
natural resource projecting countries, in order to evaluate the net
benefits of resource development, both in total and at the
margin.''); NACE (``Project level payment data is also necessary to
enable communities to conduct an informed cost-benefit analysis of
the projects in their backyard . . . . For local communities
affected by extractive projects, knowledge of the total, combined
amount a company has paid the government for all extractive projects
is of little value; what matters most to a community is the revenue
generated from the specific projects in its backyard.''). See
generally letter from CSCU (explaining that the civil society group
is planning to ``translate the oil revenues into the potential
tangible infrastructure and development projects that the revenues
could fund to improve lives of citizens throughout the country and
especially in areas where [the projects] are located . . . . By
pairing the exact number of schools, health centers, roads, and
power plants made possible by oil revenues from specific companies
and projects with actual local need, [CSCU] aim[s] to educate
citizens about the potential benefits of oil revenues, encourage
them to become more engaged . . . and demand realization of these
benefits on the ground.'').
\95\ Letter from PWYP-ZIM (explaining that without company-
specific, project-level, public disclosure, ``we would not know the
monetary amounts received by the government when it sells individual
licenses, which is fundamental to determining corruption and
incentivizing public officials to secure a fair return on the sale
of natural resources''). Cf. generally Escaping the Resource Curse,
at 14 (``Corporations in the extractive industries also have an
incentive to limit transparency, to make it more difficult for
citizens to see how much their government is getting in exchange for
sale of the country's resources.'').
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Finally, in proposing company-specific, project-level, public
disclosure of resource extraction payments to foreign governments, we
are mindful that this new transparency alone would likely not eliminate
corruption in connection with resource extraction payments to foreign
governments.\96\ The ``ultimate impact [of the disclosures] will
largely depend on the ability of all stakeholders--particularly civil
society, media, parliamentarians, and governments--to use [the]
available information to improve the management of their resource
extractive sector.'' \97\ Nevertheless, the payment transparency that
our proposed rules would promote could constitute an important and
necessary step to help combat corruption in the resource extraction
area.\98\
---------------------------------------------------------------------------
\96\ See, e.g., Escaping the Resource Curse, at 333
(``[T]ransparency may well be a necessary condition for better
management of oil and gas wealth, but it is unlikely to be a
sufficient condition.''); Alexandra Gillies & Antoine Heuty, Does
Transparency Work? The Challenges of Measurement and Effectiveness
in Resource-Rich Countries, 6 Yale J. Int'l Aff. 25 (2011) (``The
availability and access to information can only address asymmetries
if the stakeholders have the capacity and access needed to use the
information and respond when decision makers fail to represent their
interests.'').
\97\ Alexandra Gillies & Antoine Heuty, Does Transparency Work?
The Challenges of Measurement and Effectiveness in Resource-Rich
Countries, 6 Yale J. Int'l Aff. 25 (2011). See generally Dilan
Olcer, OECD Working Paper No. 276, Extracting the Maximum from EITI
(Mar. 11, 2009) (stating that ``transparency is only part of
accountability, and may be of limited value if the other dimensions
are neglected'').
\98\ See generally Escaping the Resource Curse, at 278
(explaining that ``[g]reater access to information sets the
framework for producing better monitoring'').
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Lastly, it appears to us that the U.S. Government may have few
other means beyond the disclosure mechanism required by Section 13(q)
to directly target governmental corruption associated with the
extractive sector in foreign countries.\99\ This reality informs our
view that the public disclosure mechanism that we are proposing is a
sensible, carefully tailored policy prescription.\100\
---------------------------------------------------------------------------
\99\ See generally Senate Report, 17-21 (discussing potential
policy tools available to the U.S. Government).
\100\ We note that much of the commentary on improved
transparency in connection with resource extraction payments to
governments in resource-rich developing countries focuses on the
potential to produce improved socio-economic conditions in those
countries. In the context of the disclosures required by Section
13(q), however, we believe that the primary governmental interest is
the more modest objective of reducing corruption and potentially
enhancing governmental accountability; the potential to improve
socio-economic conditions is, in our view, a secondary objective.
Compare generally Alexandra Gillies & Antoine Heuty, Does
Transparency Work? The Challenges of Measurement and Effectiveness
in Resource-Rich Countries, 6 Yale J. Int'l Aff. 25 (2011) (noting
``[m]ethodological challenges'' in demonstrating a ``causal chain
between the disclosure of information and improved development
outcomes''); with Andres Mejia Acosta, The Impact and Effectiveness
of Accountability and Transparency Initiatives: The Governance of
Natural Resources, Development Policy Review (2013) (``Existing
evidence of effective impact is also likely to increase as countries
are exposed for longer periods to [transparency and accountability
initiatives].'').
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[[Page 80068]]
II. Proposed Rules Under Section 13(q)
A. Definition of ``Resource Extraction Issuer''
Section 13(q) defines a resource extraction issuer in part as an
issuer that is ``required to file an annual report with the
Commission.'' We believe this language could reasonably be read either
to cover or to exclude issuers that file annual reports on forms other
than Forms 10-K, 20-F, or 40-F. We are proposing, however, to cover
only issuers filing annual reports on forms 10-K, 20-F, or 40-F.
Specifically, the proposed rules would define the term ``resource
extraction issuer'' to mean an issuer that is required to file an
annual report with the Commission pursuant to Section 13 or 15(d) of
the Exchange Act and that engages in the commercial development of oil,
natural gas, or minerals.\101\ The proposed definition would therefore
exclude, for example, issuers subject to Tier 2 reporting obligations
under Regulation A. In addition, consistent with the 2012 Rules,
investment companies registered under the Investment Company Act of
1940 (``Investment Company Act'') would not be subject to the proposed
rules.\102\
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\101\ See proposed Rule 13q-1(c) and proposed Item 2.01(c)(11)
of Form SD. We interpret ``engages'' as used in Section 13(q) and
proposed Rule 13q-1 to include indirectly engaging in the specified
commercial development activities through an entity under a
company's control. See Section II.E below for our discussion of
``control.''
\102\ See 2012 Adopting Release, n.390 (clarifying the
Commission's intent to exclude companies required to file annual
reports on forms other than Forms 10-K, 20-F or 40-F). The intended
exclusion was not explicit in the definition of ``resource
extraction issuer'' in the 2012 Rules. See also General Instruction
C to Form SD (providing that the disclosures required in Form SD
shall not apply to investment companies required to file reports
pursuant to Investment Company Act Rule 30d-1).
---------------------------------------------------------------------------
We believe that covering other issuers would do little to further
the transparency objectives of Section 13(q) but would add costs and
burdens to the existing disclosure regimes governing those categories
of issuers. In this regard, we note that none of the Regulation A
issuers with qualified offering statements between 2009 and 2014 appear
to have been resource extraction issuers at the time of those
filings.\103\ It also seems unlikely that an entity that fits within
the definition of an ``investment company'' \104\ would be one that is
``engag[ing] in the commercial development of oil, natural gas, or
minerals.''
---------------------------------------------------------------------------
\103\ Based on a review of their assigned Standard Industrial
Classification (SIC) codes. Nevertheless, we recognize that Tier 2
of Regulation A, with a maximum offering amount of $50 million, is a
new disclosure regime and that the types of companies previously or
currently using Regulation A may not be representative of its future
use. In addition, since Regulation A issuers were not required to
file annual reports when Section 13(q) was enacted, it seems
unlikely that Congress contemplated Regulation A issuers having to
comply with Section 13(q). Given the added costs and burdens
discussed above, we do believe it is prudent to extend the rule in
this manner.
\104\ See Section 3(a)(1) of the Investment Company Act (15
U.S.C. 80a-3(a)(1)).
---------------------------------------------------------------------------
As noted above, the proposed definition of the term ``resource
extraction issuer'' would apply only to issuers that are required to
file an annual report with the Commission pursuant to Section 13 or
15(d) of the Exchange Act. As with the 2012 Rules, we are not proposing
exemptions to the definition of resource extraction issuer based on
size, ownership, foreign private issuer status,\105\ or the extent of
business operations constituting commercial development of oil, natural
gas, or minerals. Some commenters on the 2012 Rules urged us to provide
exemptions for certain categories of issuers that file annual reports
pursuant to Section 13 or 15(d) of the Exchange.\106\ Other commenters
supported the approach we are proposing.\107\ These commenters noted
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.\108\ We agree that broader coverage would appear
to serve better the transparency objectives of Section 13(q) by
requiring disclosure from all the resource extraction issuers that are
subject to our existing Exchange Act reporting framework. Moreover, as
some commenters noted, additional categorical exemptions could
contribute to an unlevel playing field and raise competitiveness
concerns for companies that would be subject to the rules.\109\
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\105\ We believe that not including government-owned companies
within the scope of the disclosure rules could raise competitiveness
concerns. See also 2012 Adopting Release at Section II.B.
\106\ See 2012 Adopting Release at Section II.B.2 for a
discussion of these comment letters and related analysis.
\107\ See id.
\108\ See, e.g., letters from Calvert Investments (Mar. 1, 2011)
(``Calvert 1''); Global Witness (Feb. 25, 2011) (``Global Witness
1''); Oxfam America (Feb. 21, 2011) (``Oxfam 1''); Publish What You
Pay U.S. (Feb. 25, 2011) (``PWYP 1''); 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 Carl Levin (Feb. 1, 2011) (``Sen. Levin 1''); and
World Resources Institute (Mar. 1, 2011) (``WRI'').
\109\ See 2012 Adopting Release, nn. 33-34 and accompanying
text.
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In contrast to the call to provide exemptions, some commenters on
the 2010 Proposing Release requested that the Commission extend the
disclosure requirements to foreign private issuers that are exempt from
Exchange Act registration and reporting obligations pursuant to
Exchange Act Rule 12g3-2(b).\110\ Those commenters asserted that
requiring such issuers to comply with the disclosure requirements would
help ameliorate anti-competitive concerns. As noted by commenters who
opposed this suggestion, extending the disclosure required under
Section 13(q) to companies that are exempt from Exchange Act
registration and reporting would discourage reliance on Rule 12g3-2(b)
\111\ and would be inconsistent with the effect, and we believe the
purpose, of that rule.\112\ In this regard, we note that Rule 12g3-2(b)
provides relief to foreign private issuers that are not currently
Exchange Act reporting companies (i.e., they are neither listed nor
have made a registered offering in the United States) and whose primary
trading market is located outside the United States. In these
circumstances, we do not believe it would be appropriate to require
foreign private issuers whose connections with the U.S. markets do not
otherwise require them to make reports with the Commission to undertake
such an obligation solely for the purpose of providing the required
payment information. Moreover, imposing a reporting obligation on such
issuers would seem to go beyond what is contemplated by Section 13(q),
which defines a ``resource extraction issuer'' as an issuer that is
``required to file an annual report with the Commission.'' \113\ While
we acknowledge that not requiring these issuers to disclose the
required payment information could potentially limit the transparency
objectives of the statute, and potentially give rise to anti-
competitive concerns as some commenters suggested, we believe these
effects are mitigated by the fact that some foreign private issuers
that are exempt from registration and reporting under Rule 12g3-2(b)
may be listed in foreign jurisdictions, such as the European Union or
Canada, that have recently implemented their own revenue transparency
measures, in which case these issuers will be
[[Page 80069]]
required to disclose similar payment information in their home
jurisdictions.
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\110\ See letters from American Petroleum Institute (Jan. 28,
2011) (``API 1''); Calvert 1; Exxon Mobil (Jan. 31, 2011)
(``ExxonMobil 1''); Global Witness 1; Revenue Watch Institute (Feb.
17, 2011) (``RWI 1''); and Royal Dutch Shell plc (Jan. 28, 2011)
(``RDS 2'').
\111\ See letter from New York State Bar Association, Securities
Regulation Committee (Mar. 1, 2011) (``NYSBA Committee'').
\112\ See letter from National Mining Association (Mar. 2, 2011)
(``NMA 2'') and NYSBA Committee.
\113\ See 15 U.S.C. 78m(q)(1)(D).
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Request for Comment
1. Should we exempt certain categories of issuers from the proposed
rules, such as smaller reporting companies, emerging growth
companies, or foreign private issuers? \114\ If so, which ones and
why? If not, why not? Should we exempt companies that are unlikely
to make payments above the proposed de minimis threshold of
$100,000? \115\ For example, should we provide that a resource
extraction issuer with annual revenues and net cash flows from
investing activities below the de minimis threshold in a fiscal year
would not be subject to the proposed disclosure rules for the
subsequent fiscal year? Should we use a threshold that is different
from the de minimis threshold or some other measure of an issuer's
ability to make such payments to make this determination?
Alternatively, should our rules provide for different disclosure and
reporting obligations for these or other types of issuers? If so,
what should the requirements be?
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\114\ See the definition of ``smaller reporting company'' in
Exchange Act Rule 12b-2 [17 CFR 240.12b-2], the definition of
``emerging growth company'' in Exchange Act Section 3(a)(80) [15
U.S.C. 78c(a)(80)], and the definition of ``foreign private issuer''
in Exchange Act Rule 3b-4 [17 CFR 240.3b-4].
\115\ See Sections II.C.2 and III.B.2.b below.
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2. Should we provide for a delayed implementation date for certain
categories or types of issuers in order to provide them additional
time to prepare for the disclosure requirements and the benefit of
observing how other companies comply?
3. Should we, as proposed, limit the definition of ``resource
extraction issuer'' to those issuers that are required to file an
annual report with us under Exchange Act Section 13 or 15(d), thus
excluding issuers who file annual reports pursuant to other
provisions? Why or why not? For example, should we, as proposed,
exclude issuers subject to Tier 2 reporting obligations under
Regulation A?
4. Would our proposed rules present unique challenges for particular
categories of issuers? If so, what is the nature of these challenges
and could they be mitigated?
5. Should we define ``resource extraction issuer'' to include
investment companies registered under the Investment Company Act?
Why or why not?
B. Definition of ``Commercial Development of Oil, Natural Gas, or
Minerals''
As noted above, Section 13(q) defines ``commercial development of
oil, natural gas, or minerals.'' \116\ Consistent with the statute and
the 2012 Rules we propose to define ``commercial development of oil,
natural gas, or minerals'' to include exploration, extraction,
processing, export and the acquisition of a license for any such
activity. This approach should enhance international transparency by
covering activities similar to those covered by the EU Directives and
Canada's ESTMA.\117\ Prior to the 2012 Rules, we received significant
comment on this aspect of the proposal. Some commenters sought a more
narrow definition than proposed, while other commenters sought a
broader definition.\118\ Although we have discretionary authority under
Section 13(q) to include other significant activities relating to oil,
natural gas, or minerals, we are not proposing to do so. As a general
matter, in light of the potentially significant costs associated with
the proposed rules, we have not sought to impose disclosure obligations
that extend beyond Congress' required disclosures and the disclosure
standards developed in connection with international transparency
efforts. In this regard, we note that the definition of ``commercial
development'' in Section 13(q) is broader than the activities typically
covered by the EITI \119\ and in some respects, other comparable
disclosure regimes.\120\
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\116\ See Section I above.
\117\ The EU Directives cover ``exploration, prospection,
discovery, development, and extraction of minerals, oil, natural gas
deposits or other materials.'' See, e.g., Article 41(1) of the EU
Accounting Directive. ESTMA defines ``commercial development of oil,
gas or minerals'' as ``(a) the exploration or extraction of oil, gas
or minerals; (b) the acquisition or holding of a permit, licence,
lease or any other authorization to carry out any of the activities
referred to in paragraph (a); or (c) any other prescribed activities
in relation to oil, gas or minerals.''
\118\ See 2012 Adopting Release at Section II.C.2. Although we
have received several comments since the U.S. District Court for the
District of Columbia vacated the rules adopted in 2012, none has
addressed the scope of ``commercial development.''
\119\ An EITI plan typically covers the ``upstream activities''
of exploration and production but not ``downstream activities,''
such as processing or export. The relevant multi-stakeholder group
does, however, have the option of expanding the scope of its EITI
program by including some downstream activities. See the EITI
Handbook, at 35.
\120\ For example, processing, export, and the acquisition of
licenses are not specifically mentioned by the EU Directives.
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As noted in the 2010 Proposing Release, the proposed definition of
``commercial development'' is intended to capture only activities that
are directly related to the commercial development of oil, natural gas,
or minerals.\121\ It is not intended to capture activities that are
ancillary or preparatory to such commercial development. Accordingly,
we would not consider an issuer providing only services that support
the exploration, extraction, processing, or export of such resources to
be a ``resource extraction issuer,'' such as an issuer that
manufactures drill bits or provides hardware to help companies explore
and extract.\122\ Similarly, an issuer engaged by an operator to
provide hydraulic fracturing or drilling services, thus enabling the
operator to extract resources, would not be considered a resource
extraction issuer. We note, however, that where a service provider
makes a payment to a government on behalf of a resource extraction
issuer that meets the definition of ``payment,'' under the proposed
rules, the resource extraction issuer would be required to disclose
such payments. We believe this approach is consistent with Section
13(q) and the approach of the EU Directives and the EITI that only
companies directly engaged in the extraction or production of oil,
natural gas, or minerals must disclose payments made to
governments.\123\
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\121\ See 2010 Proposing Release at Section II.C.
\122\ Marketing activities would also not be included. Section
13(q) does not include marketing in the list of activities covered
by the definition of ``commercial development.'' In addition,
including marketing activities within the final rules under Section
13(q) would go beyond what is covered by the EITI and other
international regimes. See, e.g., the EITI Handbook, at 35. For
similar reasons, the definition of ``commercial development'' does
not include activities relating to security support. See 2012
Adopting Release at Section II.D for a related discussion of
payments for security support.
\123\ It does not appear that such activities are covered by the
EU Directives' provisions on resource extraction payment disclosure.
For example, Article 41 of the EU Accounting Directive only refers
to the economic activities listed in ``Section B, Divisions 05 to 08
of Annex I to Regulation (EC) No 1893/2006'' when defining the types
of companies subject to the disclosure rules. Activities such as
``mining support service activities'' and ``support activities for
petroleum and natural gas extraction,'' however, are not included in
those Divisions but are explicitly included in Division 09.
---------------------------------------------------------------------------
In response to commenters' prior requests for clarification of the
activities covered by the proposed definition of ``commercial
development,'' we are identifying the activities that would be covered
by the terms ``extraction'' and ``export'' and providing examples of
the activities that would be covered by the term ``processing.'' We
note, however, that whether an issuer is a resource extraction issuer
would depend on the specific facts and circumstances. ``Extraction''
would mean the production of oil and natural gas as well as the
extraction of minerals.\124\ ``Processing'' would include, but is not
limited to, midstream activities such as the processing of gas to
remove liquid hydrocarbons, the removal of impurities from natural gas
prior to its transport through a pipeline, and the upgrading of bitumen
and heavy oil, through the earlier of the point at which oil, gas, or
gas liquids (natural or synthetic) are
[[Page 80070]]
either sold to an unrelated third party or delivered to a main
pipeline, a common carrier, or a marine terminal. It would also include
the crushing and processing of raw ore prior to the smelting
phase.\125\
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\124\ Proposed Item 2.01(c)(5) of Form SD.
\125\ See proposed Instruction 7 to Item 2.01 of Form SD.
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We do not believe that ``processing'' should include the downstream
activities of refining or smelting. The objective of the disclosure
required by Section 13(q) is to make more transparent the payments that
resource extraction issuers make to governments, which are primarily
generated by ``upstream'' activities like exploration and extraction.
Issuers do not typically make payments to the host government in
connection with refining or smelting. We also note that in other
contexts Congress has treated midstream activities like ``processing''
and downstream activities like ``refining'' as separate activities,
which further supports our view that Congress did not intend to include
``refining'' and ``smelting'' as ``processing'' activities.\126\
Finally, we note that including refining or smelting within the rules
under Section 13(q) would go beyond what is currently contemplated by
the EITI, which does not typically include the downstream activities of
refining and smelting.\127\ The EU Directives also do not cover
refining or smelting in its list of covered activities.\128\
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\126\ The Sudan Accountability and Divestment Act of 2007
(``SADA''), which also relates to resource extraction activities,
specifically includes ``processing'' and ``refining'' as two
distinct activities in its list of ``mineral extraction activities''
and ``oil-related activities . . .'' See 110 P.L. No. 174 (2007).
Similarly, the Commission's oil and gas disclosure rules exclude
refining and processing from the definition of ``oil and gas
producing activities'' (other than field processing of gas to
extract liquid hydrocarbons by the company and the upgrading of
natural resources extracted by the company other than oil or gas
into synthetic oil or gas). See Rule 4-10(a)(16)(ii) of Regulation
S-X [17 CFR 210.4-10(a)(16)(ii)] and 2012 Adopting Release, n.108.
\127\ See, e.g., the EITI Handbook, at 35.
\128\ See, e.g., Article 41(1) of the EU Accounting Directive
(including ``exploration, prospection, discovery, development, and
extraction'' in the definition of an ``undertaking active in the
extractive industry,'' but not including refining or smelting).
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``Export'' would mean the transportation of a resource from its
country of origin to another country by an issuer with an ownership
interest in the resource.\129\ This definition of the term ``export''
reflects the significance of the relationship between upstream
activities such as exploration and extraction and the categories of
payments to governments identified in the statute. In contrast, we do
not believe that Section 13(q) was intended to capture payments related
to transportation on a fee-for-service basis across an international
border by a service provider with no ownership interest in the
resource.\130\
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\129\ See proposed Item 2.01(c)(4) of Form SD. Several
commenters have argued that ``export'' means the removal of the
resource from the place of extraction to the refinery, smelter, or
first marketable location. See 2012 Adopting Release, nn.111, 112,
134 and accompanying text. We believe that our interpretation of
``export'' better captures the intended meaning of that term. In
this regard, we are not aware of anything in Section 13(q) or the
legislative history that suggests Congress meant ``export'' to have
a meaning that does not require the resource to be transported
across an international boundary.
\130\ It is noteworthy that Section 13(q) includes export, but
not transportation, in the list of covered activities. In contrast,
SADA specifically includes ``transporting'' in the definition of
``oil and gas activities'' and ``mineral extraction activities.''
The inclusion of ``transporting'' in SADA, in contrast to the
language of Section 13(q), suggests that the term export means
something different than transportation.
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In an effort to emphasize substance over form or characterization
and to reduce the risk of evasion, we are also proposing an anti-
evasion provision.\131\ The proposed rules would require disclosure
with respect to an activity (or payment) that, although not within the
categories included in the proposed rules, is part of a plan or scheme
to evade the disclosure required under Section 13(q).\132\ For example,
under this provision a resource extraction issuer could not avoid
disclosure by re-characterizing an activity as transportation that
would otherwise be covered under the rules.\133\
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\131\ See Section II.C.1 below for more detail on the anti-
evasion provision.
\132\ See proposed Rule 13q-1(b).
\133\ Similarly, if a resource extraction issuer were to make a
payment to a third party in order to avoid disclosure under the
proposed rules, whether at the direction of a foreign government or
otherwise, the proposed rules would require the disclosure of such
payment.
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Request for Comment
6. Should we, as proposed, define ``commercial development of oil,
natural gas, or minerals'' as the term is described in the statute?
Should it be defined more broadly or more narrowly? If more broadly,
should the definition of ``commercial development of oil, natural
gas, or minerals'' include any additional activities not expressly
identified in the statute? If so, what activities should be covered?
Would including additional activities impose any significant
additional costs on issuers? Does our proposed definition further
the U.S. Government's foreign policy objective of battling
corruption and, in so doing, potentially improve governance and
accountability in resource-rich countries? If not, what would?
7. Should any of the activities listed in the statute be excluded
from the definition of ``commercial development of oil, natural gas,
or minerals?'' If any activities should be excluded, which
activities and why?
8. Should activities that are ancillary or preparatory, such as
services associated with or in support of activities included in
Section 13(q), be expressly included in activities covered by the
rules, resulting in the companies performing such services being
considered ``resource extraction issuers?'' Why or why not? Should
we provide any additional guidance regarding the types of activities
that may be ``directly related'' to the ``commercial development of
oil, natural gas, or minerals,'' as opposed to activities that are
ancillary or preparatory? For example, are other types of services
so critical to the commercial development of oil, natural gas, or
minerals that they should be covered expressly by the rules? Why or
why not?
9. Should we provide additional guidance on which activities would
be covered by the terms ``extraction,'' ``processing,'' and
``export?'' If so, what guidance would be helpful?
10. As noted above, ``extraction'' would mean the production of oil
and natural gas as well as the extraction of minerals. Are the
activities covered too narrow or too broad?
11. As noted above, ``processing'' would include midstream
activities such as (a) the processing of gas to remove liquid
hydrocarbons, (b) the removal of impurities from natural gas prior
to its transport through a pipeline, (c) the upgrading of bitumen
and heavy oil, through the earlier of the point at which oil, gas,
or gas liquids (natural or synthetic) are either sold to an
unrelated third party or delivered to a main pipeline, a common
carrier, or a marine terminal, and (d) the crushing and processing
of raw ore prior to the smelting phase. Are these examples of
``processing'' too narrow or too broad? Why or why not?
12. As discussed above, the definition of ``commercial development
of oil, natural gas, or minerals'' would not cover transportation
made for a purpose other than export and ``export'' would mean
transportation from the resource's country of origin to another by a
person with an ownership interest in the resource. Are the
activities covered too narrow or too broad? Why or why not? For
example, should the definition be broadened to include
``transportation'' more generally? Should ``export'' include all
transportation from one country to another, regardless of ownership
interest or whether the resource originated in the country from
which it is being transported?
C. Definition of ``Payment''
Section 13(q) defines ``payment'' to mean a payment that:
Is made to further the commercial development of oil,
natural gas, or minerals;
is not de minimis; and
[[Page 80071]]
includes taxes, royalties, fees (including license fees),
production entitlements, bonuses, and other material benefits, that the
Commission, consistent with the EITI's guidelines (to the extent
practicable), determines are part of the commonly recognized revenue
stream for the commercial development of oil, natural gas, or minerals.
1. Types of Payments
Consistent with the 2012 Rules, the proposed rules define payments
to include the specific types of payments identified in the statute. In
addition to the statutory mandate to include these types of payments,
we note that these payments are identified in the EITI's
guidelines,\134\ as well as the EU Directives and other regulations.
Thus, including them is also consistent with the Congressional mandate
for our rules to support international transparency promotion efforts.
In addition to the types of payments expressly included in the
definition of payment in the statute, Section 13(q) provides that the
Commission include within the definition ``other material benefits,''
subject to the requirement that it determines they are ``part of the
commonly recognized revenue stream for the commercial development of
oil, natural gas, or minerals.'' According to Section 13(q), these
``other material benefits'' must be consistent with the EITI's
guidelines ``to the extent practicable.'' \135\
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\134\ See EITI Standard, at 26.
\135\ 15 U.S.C. 78m(q)(1)(C)(ii).
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Some commenters suggested that we include a broad, non-exhaustive
list of payment types or category of ``other material benefits.'' \136\
That approach, however, would be inconsistent with our view that
Section 13(q) directs us to make an affirmative determination that the
other ``material benefits'' are part of the commonly recognized revenue
stream. Thus, under the proposed rules, resource extraction issuers
would be required to disclose only those payments that fall within the
specified list of payment types in the statute, as well as payments of
certain dividends and for infrastructure payments (discussed below). We
have determined that these payment types represent material benefits
that are part of the commonly recognized revenue stream and that
otherwise meet the definition of ``payment.'' In support of this
determination, we note that the EU Directives and other recent
international transparency promotion efforts also require only these
payment types to be disclosed.\137\
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\136\ See 2012 Adopting Release, n.175 and accompanying text.
\137\ See, e.g., Article 41(5) of the EU Accounting Directive
and Section 2 of ESTMA.
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We agree with certain commenters who stated that it would be
appropriate to add some of the types of payments included under the
EITI that are not explicitly mentioned under Section 13(q).\138\
Accordingly, we propose adding dividends to the list of payment types
required to be disclosed. The proposed rules clarify in an instruction
that a resource extraction issuer generally would not need to disclose
dividends paid to a government as a common or ordinary shareholder of
the issuer as long as the dividend is paid to the government under the
same terms as other shareholders.\139\ The issuer would, however, be
required to disclose any dividends paid to a government in lieu of
production entitlements or royalties. Under this approach, ordinary
dividend payments would not be part of the commonly recognized revenue
stream, because they are not made to further the commercial development
of oil, natural gas, or minerals.\140\
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\138\ See, e.g., letter from AngloGold Ashanti (Jan. 31, 2011)
(``AngloGold'').
\139\ See proposed Instruction 10 to Item 2.01 of Form SD.
\140\ See letters from Cleary Gottlieb Steen & Hamilton (Mar. 2,
2011) (``Cleary'') and Statoil.
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The proposed list of payment types subject to disclosure would also
include payments for infrastructure improvements, such as building a
road or railway to further the development of oil, natural gas, or
minerals. Several commenters 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.\141\ For example, 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.\142\ We further note that payments for
infrastructure improvements have been required under the EITI since
2011.\143\
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\141\ See letters from AngloGold; Barrick Gold Corporation (Feb.
28, 2011) (``Barrick Gold''); EarthRights International (Jan. 26,
2011) (``ERI 1''); Earthworks (Mar. 2, 2011) (``Earthworks''); EG
Justice (Mar. 29, 2011) (``EG Justice 1''); Global Witness 1; ONE
(Mar. 2, 2011) (``ONE''); and PWYP 1.
\142\ For additional discussion of our proposed approach to in-
kind payments, see note 156 below and the accompanying text. See
also 2012 Adopting Release, n.212 and accompanying text. Some
commenters 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 2; and Statoil. To the
extent that such payments are de minimis, however, they would be
excluded under the proposed definition.
\143\ In February 2011, the EITI Board issued revised EITI rules
that require participants to develop a process to disclose
infrastructure payments under an EITI program. See EITI Rules 2011,
available at http://eiti.org/document/rules. See also 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 . . . .'') and EITI Standard, at 27
(``The multi-stakeholder group and the independent administrator are
required to consider whether there are any agreements, or sets of
agreements, involving the provision of goods and services, including
loans, grants and infrastructure works, in full or partial exchange
for oil, gas or mining exploration or production concessions or
physical delivery of such commodities. . . Where the
multistakeholder group concludes that these agreements are material,
the multistakeholder group and the Independent Administrator are
required to ensure that the EITI Report addresses these agreements,
providing a level of detail and transparency commensurate with the
disclosure and reconciliation of other payments and revenues
streams.'').
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In sum, the comments described above and the EITI's inclusion of
dividend and infrastructure payments provide substantial support for
our determination that that they are part of the commonly recognized
revenue stream for the commercial development of oil, natural gas, or
minerals. Moreover, including payment types in the proposed rules that
are required to be disclosed under the EITI would be consistent with
the statute's directive.\144\
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\144\ 15 U.S.C. 78m(q)(1)(C)(ii).
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The proposed 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 remains unclear whether these types of
payments are part of the commonly recognized revenue stream. In this
regard, we note that other recently enacted international transparency
promotion efforts, such as the EU Directives and ESTMA, do not include
social or community payments.\145\ Although we acknowledge that the
EITI's current requirement includes the disclosure of material ``social
expenditures'' in an EITI report when those expenditures are required
by law or contract,\146\ we note that the
[[Page 80072]]
disclosure of social payments is outside of the scope of the more
recent international efforts in the European Union and Canada.\147\ In
addition, there was no clear consensus among the commenters on whether
the proposed rules should include social or community payments as part
of identified payments that are required to be disclosed.\148\ In light
of that, and taking into account our statutory mandate to support
international transparency promotion efforts and our desire to minimize
the additional compliance costs to issuers that would result from
having to track and disaggregate such payments, we are proposing to
follow the approach of the European Union and Canada in not proposing
to require the disclosure of social or community payments.
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\145\ See, e.g., the EU Directives, the U.K. regulations
implementing the EU Directives, and Canada's ESTMA.
\146\ See EITI Standard, at 27 (``Where material social
expenditures by companies are mandated by law or the contract with
the government that governs the extractive investment, the EITI
Report must disclose and, where possible, reconcile these
transactions.'').
\147\ See EU Accounting Directive, Article 41(5) and ESTMA,
Section 2, both of which list types of payments covered by the
disclosure regulations without including social payments. But see
ESTMA Guidance, Section 3.4 (outlining that ``payments made for
corporate social responsibility purposes'' may be required to be
disclosed if ``made in lieu of one of the payment categories that
would need to be reported under [ESTMA]'').
\148\ See, e.g., letters from AngloGold; API 1; Barrick Gold;
Earthworks; EG Justice 1; ERI 1; ExxonMobil 1; Global Witness 1; NMA
2; ONE; PetroChina Company Limited (Feb. 28, 2011) (``PetroChina'');
PWYP 1, RDS 2, Sen. Levin 1; Statoil; and U.S. Agency for
International Development (July 15, 2011) (``USAID'').
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Consistent with Section 13(q), the proposed rules would 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 commenters,\149\ the
proposed rules clarify that fees include rental fees, entry fees, and
concession fees, and that bonuses include signature, discovery, and
production bonuses.\150\ As commenters noted,\151\ the EITI also
specifically mentions these types of fees and bonuses as payments that
should be disclosed by EITI participants.\152\ This supports our view
that these types of fees and bonuses are part of the commonly
recognized revenue stream. 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 would need to consider whether payments it makes fall within the
payment types that would be covered by the proposed rules.
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\149\ See 2012 Adopting Release, n.160 and accompanying text.
\150\ See proposed Instruction 9 to Item 2.01 of Form SD.
\151\ See, e.g., letters from API 1 and ExxonMobil 1.
\152\ See EITI Standard, at 26.
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Consistent with Section 13(q), the proposed rules would require a
resource extraction issuer to disclose taxes. In addition, the proposed
rules include an instruction to clarify that a resource extraction
issuer would be required to disclose payments for taxes levied on
corporate profits, corporate income, and production, but would not be
required to disclose payments for taxes levied on consumption, such as
value added taxes, personal income taxes, or sales taxes.\153\ In
response to earlier concerns expressed about the difficulty of
allocating certain payments that are made for obligations levied at the
entity level, such as corporate taxes, to the project level,\154\ the
proposed rules would provide that issuers may disclose those payments
at the entity level rather than the project level.\155\
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\153\ See proposed Instruction 8 to Item 2.01 of Form SD.
\154\ See 2012 Adopting Release, n.155 and accompanying text.
\155\ See proposed Instruction 4 to Item 2.01 of Form SD.
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Many commenters supported the inclusion of in-kind payments,
particularly in connection with production entitlements.\156\ We also
note that the EU Directives and ESTMA require disclosure of in-kind
payments.\157\ Under the proposed rules, resource extraction issuers
must disclose payments of the types identified in the rules that are
made in-kind.\158\ Since Section 13(q) specifies that the rules require
the disclosure of the type and total amount of payments made for each
project and to each government, issuers would need to determine the
monetary value of in-kind payments.\159\ Consistent with suggestions we
received on disclosing these types of payments,\160\ the proposed 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.\161\
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\156\ See 2012 Adopting Release, nn.170, 211 and accompanying
text. In-kind payments include, for example, making a payment to a
government in oil rather than a monetary payment.
\157\ Article 41 of the EU Accounting Directive and Section 2 of
ESTMA specifically include ``in kind'' payments in their definitions
of ``payment.''
\158\ This would be consistent with the reporting of production
entitlements under the EITI. See EITI Standard, at 27.
\159\ In addition, in light of the requirement in Section 13(q)
to tag the information to identify the currency in which the
payments were made, the proposed rules would instruct issuers
providing a monetary value for in-kind payments to tag the
information as ``in-kind'' for purposes of the currency tag.
\160\ See 2012 Adopting Release, n.173 and accompanying text.
\161\ See proposed Instruction 11 to Item 2.01 of Form SD. See
also Section 3(e) of ESTMA (``[T]he value of a payment in kind is
the cost to the entity--or, if the cost cannot be determined, the
fair market value--of the goods and services that it provided.'').
The EU Directives do not specify how in-kind payments should be
calculated, but require ``supporting notes . . . to explain how
their value has been determined.'' See, e.g., Section 43(3) of the
EU Accounting Directive.
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Finally, as mentioned above,\162\ the proposed rules would also
require disclosure of activities or payments that, although not within
the categories included in the proposed rules, are part of a plan or
scheme to evade the disclosure requirements under Section 13(q).\163\
In other words, and as suggested by one commenter,\164\ 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. For
example, a resource extraction issuer that typically makes payments
related to an activity covered under the definition of commercial
development of oil, natural gas, or minerals would not be able to evade
the disclosure requirements by changing the way it makes payments or by
re-categorizing the same activity.
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\162\ See Section II.B above.
\163\ See proposed Rule 13q-1(b).
\164\ See letter from Sen. Levin (Feb. 17, 2012) (``Sen. Levin
2'').
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Request for Comment
13. Should we add other payment types, such as social or community
payments, or remove certain payment types from the proposed list of
covered payment types? If so, please explain which payment types
should or should not be considered part of the commonly recognized
revenue stream for resource extraction issuers and why. If we
exclude social or community payments from the list of covered
payment types, as proposed, should we provide additional guidance
concerning how an issuer would distinguish social or community
payments from infrastructure payments? Why or why not?
14. Should we provide different or additional guidance on how to
interpret the proposed list of covered payment types? For example,
should we specify additional types of fees or bonuses in Instruction
8 to Form SD or should we clarify what other types of payment mean,
such as royalties?
15. Should we prescribe a specific method for determining the fair
market value of in-kind payments? If so, please explain how fair
market value should be determined for such payments. Should we
provide guidance concerning
[[Page 80073]]
appropriate methods for determining fair market value for in-kind
payments?
16. Will the proposed anti-evasion provision promote compliance with
the disclosure requirements? Should additional guidance be provided
about when the anti-evasion provision would apply?
2. The ``Not De Minimis'' Requirement
The proposed rules would define a ``not de minimis'' payment in the
same way as the 2012 Rules. A ``not de minimis'' payment would be one
that equals or exceeds $100,000, or its equivalent in the issuer's
reporting currency, whether made as a single payment or series of
related payments.\165\ This definition would provide a clear standard
for determining which payments a resource extraction issuer must
disclose. Furthermore, we note that after the 2012 Rules were adopted,
several countries established payment thresholds that approximate the
proposed $100,000 standard.\166\ We believe that the establishment of a
similar payment threshold by these countries diminishes any potential
additional compliance burden and potential competitive harm that
otherwise could be caused by disclosure rules that include a payment
threshold that varies significantly from the standard used in other
jurisdictions.
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\165\ See proposed Item 2.01(c)(8)(ii) of Form SD. For example,
a resource extraction issuer that paid a $150,000 signature bonus
would be required to disclose that payment. The proposed definition
also clarifies that disclosure would be required for related
periodic payments (e.g., rental fees) when the aggregate amount of
such payments exceeds the payment threshold. This is similar to
other instructions in our rules requiring disclosure of a series of
payments. See, e.g., Instructions 2 and 3 to Item 404(a) of
Regulation S-K (17 CFR 229.404(a)). Therefore, 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.
\166\ See EU Accounting Directive, Article 43(1) and Recital 46
(using [euro]100,000, or approximately $107,000 (USD) as of Nov. 10,
2015); UK Reports on Payments to Governments Regulations 2014 (2014
Statutory Instrument No. 3209), Part 1, 5.-(3) (using [pound]86,000,
or approximately $129,860 (USD) as of Nov. 10, 2015); Norwegian
Regulations, Section 3 (using 800,000 kr, or approximately $92,480
(USD) as of Nov. 10, 2015); and ESTMA, Section 9(2) (using $100,000
(CAD), or approximately $75,400 (USD) as of Nov. 10, 2015).
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We considered whether to define the term using a standard based on
the materiality of the payment to the issuer, as some commenters
recommended.\167\ As we previously noted, however, the use of the
phrase ``not de minimis'' in Section 13(q), rather than the use of a
materiality standard, which is used elsewhere in the federal securities
laws and in the EITI,\168\ suggests that ``not de minimis'' should not
be interpreted to equate to a materiality standard. More fundamentally,
for purposes of Section 13(q), we do not believe that the relevant
point of reference for assessing whether a payment is ``not de
minimis'' is its financial significance for 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, the more
appropriate focal point for determining whether a payment is ``not de
minimis'' is in relation to host countries. We recognize, however, that
issuers may have difficulty assessing the significance of particular
payments for particular countries or recipient governments. Thus, as
discussed above, we are proposing a $100,000 threshold that is
consistent with the developing international consensus for payment
reporting thresholds.
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\167\ See 2012 Adopting Release, n.224 and accompanying text.
\168\ See 2012 Adopting Release, n.218 and accompanying text.
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Among the suggested approaches for defining ``not de minimis,''
\169\ we believe that a standard based on an absolute dollar amount is
the most appropriate because it would be easier to apply than a
qualitative standard or a relative quantitative standard based on some
fluctuating measure, such as a percentage of expenses or revenues of
the issuer \170\ or 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.\171\ In the 2012 Adopting Release, the
Commission considered other specific dollar thresholds,\172\ but we
believe that those thresholds are not appropriate, particularly in
light of international developments.\173\
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\169\ See 2012 Adopting Release at Section II.D.2.
\170\ See 2012 Adopting Release, nn.231-233 and accompanying
text.
\171\ See 2012 Adopting Release, n.233 and accompanying text.
\172\ See 2012 Adopting Release at Section II.D.2.b for a
discussion of commenters' recommendations of a $15,000 or $1,000,000
threshold.
\173\ See note 166 above and accompanying text.
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Although some commenters thought a $100,000 threshold was too
high,\174\ we believe this threshold would strike 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. A ``not de
minimis'' definition based on a materiality standard, or a much higher
amount, such as $1,000,000, could lessen commenters' concerns about the
compliance burden and the potential for competitive harm. Nevertheless,
as discussed above, these concerns are mitigated by the use of a
threshold consistent with international standards, and the term ``not
de minimis'' indicates that a threshold significantly less than
$1,000,000, is necessary to further the transparency goals of the
statute.
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\174\ See, e.g., letters from Catholic Relief Services and
Committee on International Justice and Peace (Feb. 9, 2011)
(``CRS'') (supporting a threshold that is significantly less than
$100,000); EarthRights International (Feb. 3, 2012) (``ERI 3'')
(pointing to the $15,000 threshold used by the London Stock
Exchange's Alternative Investment Market).
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Request for Comment
17. Should we define ``not de minimis'' differently than as
proposed? For example, are there any data or have there been any
recent developments suggesting that a $100,000 threshold is too low
or too high? What would be the effect if we adopted a threshold
significantly different from those established by other countries
for their payment disclosure regimes? Should we include a mechanism
to adjust periodically the de minimis threshold to reflect the
effects of inflation? If so, what is an appropriate interval for
such adjustments and what should the basis be for making any such
adjustments in light of our understanding that the appropriate focal
point for determining whether a payment is ``not de minimis'' is in
relation to host countries?
18. Should we provide additional guidance on when or how a resource
extraction issuer would have to aggregate a series of related
payments for purposes of determining whether the $100,000 threshold
has been met? If so, what specific guidance should we provide?
19. Should we include any provisions to lessen the potential
reporting costs for smaller reporting companies or emerging growth
companies? For example, should we provide a higher ``de minimis''
threshold for certain categories of issuers generally or for a
certain length of time? Would doing so be consistent with Section
13(q)?
D. Payments by ``a Subsidiary . . . or an Entity Under the Control of .
. .''
In addition to requiring an issuer to disclose its own payments,
Section 13(q) also requires a resource extraction issuer to disclose
payments by a subsidiary or an entity under the control of the issuer
made to a foreign government or the Federal Government relating to the
commercial development of oil, natural gas, or minerals. In a change
from the 2012 Rules, however, the proposed rules would define the terms
``subsidiary'' and ``control'' based on accounting principles rather
than using the definitions of those terms
[[Page 80074]]
provided in Rule 12b-2.\175\ We believe that this change is appropriate
in light of the significant international developments since the 2012
Rules were vacated. Specifically, the proposed approach would
complement two major international transparency regimes, the EU
Directives and ESTMA, neither of which were in place when the 2012
Rules were adopted.\176\ The proposed approach should therefore support
international transparency promotion efforts by fostering greater
consistency and comparability of payments disclosed by resource
extraction issuers. As such, we believe it is consistent with our
statutory mandate to support the commitment of the Federal Government
to international transparency promotion efforts, to the extent
practicable.\177\
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\175\ Under Exchange Act Rule 12b-2 [17 CFR 240.12b-2],
``control'' (including the terms ``controlling,'' ``controlled by''
and ``under common control with'') is defined to mean ``the
possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether
through the ownership of voting shares, by contract, or otherwise.''
Rule 12b-2 also defines ``subsidiary'' (``A `subsidiary' of a
specified person is an affiliate controlled by such person directly,
or indirectly through one or more intermediaries). See also the
definitions of ``majority-owned subsidiary,'' ``significant
subsidiary,'' and ``totally-held subsidiary'' in Rule 12b-2.
\176\ See, e.g., EU Accounting Directive, Article 44 (providing
for the preparation of consolidated reports, subject to limited
exceptions). ESTMA provides that ``control'' includes both direct
and indirect control, but Section 2.1 of the ESTMA Guidance states
that ``[w]here one business controls another enterprise under the
accounting standards applicable to it . . . that will generally be
sufficient evidence of control for purposes of the Act.''
\177\ In light of the changes in the international landscape, we
have also given further consideration to commenters' concerns with
the potential compliance impact of the 2012 Rules as proposed. See
letters from API 1, API (Nov. 7, 2013) (``API 6''); Barrick Gold,
British Petroleum p.l.c. (Feb. 11, 2011) (``BP 1''); Cleary;
ExxonMobil 1; General Electric (Mar. 4, 2011) (``GE''); NMA 2; NYSBA
Committee; Petroleo Brasileiro S.A. (Feb. 21, 2011) (``Petrobras'');
RDS 2; Rio Tinto plc (Mar. 2, 2011) (``Rio Tinto''); and Statoil.
See also 2012 Adopting Release at Section II.D.4.b (discussing
comments related to the definition of ``control'' proposed in the
2010 Proposing Release).
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Under the proposed approach, a resource extraction issuer would
have ``control'' of another entity when the issuer consolidates that
entity or proportionately consolidates an interest in an entity or
operation under the accounting principles applicable to its financial
statements included in the periodic reports filed pursuant to Section
13(a) or 15(d) of the Exchange Act. Thus, for purposes of determining
control, the resource extraction issuer would follow the consolidation
requirements under generally accepted accounting principles in the
United States (``U.S. GAAP'') or under the International Financial
Reporting Standards as issued by the International Accounting Standards
Board (``IFRS''), as applicable.\178\ The extent to which the
controlled entity is consolidated would determine the extent to which
payments made by that entity would need to be disclosed. For example, a
resource extraction issuer that proportionately consolidates an entity
would have to report that entity's eligible payments on a proportionate
basis, listing the proportionate interest.
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\178\ See Accounting Standards Codification (``ASC'') 810,
Consolidation, IFRS 10, Consolidated Financial Statements and IFRS
11, Joint Arrangements for guidance. A foreign private issuer that
prepares financial statements according to a comprehensive set of
accounting principles, other than U.S. GAAP or IFRS, and files with
the Commission a reconciliation to U.S. GAAP would be required to
determine whether or not an entity is under its control using U.S.
GAAP.
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In addition, as commenters have noted, using this definition would
be more transparent for investors and less costly for issuers, because
issuers already apply the definition for financial reporting
purposes.\179\ As such, it would facilitate compliance with the
proposed rules. It also would have the benefit of limiting the
potential overlap of the disclosed payments because under applicable
financial reporting principles, generally only one party can control an
entity, and therefore consolidate, that entity. Further, the proposed
approach may enhance the quality of the reported data since each
resource extraction issuer is required to provide audited financial
statement disclosure of its significant consolidation accounting
policies in the notes to the audited financial statements included in
its existing Exchange Act annual reports.\180\ The disclosure of these
accounting policies would provide greater transparency about how the
issuer determined which entities and payments should be included within
the scope of the required disclosures. Finally, a resource extraction
issuer's determination of control under the proposed rules would be
subject to the audit process as well as to the internal accounting
controls that issuers are required to have in place with respect to
reporting audited financial statements filed with the Commission.\181\
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\179\ See letter from API 6 (supporting this approach). But see
letters from BHP Billiton Limited (Oct. 15, 2015) (``BHP''); Global
Witness 2; Publish What You Pay (Mar. 14, 2014) (``PWYP 4'');
Resource Revenue Transparency Working Group (Jan. 16, 2014)
(``RRTWG'') supporting alternative definitions.
\180\ See ASC 235-10-50; IFRS 8. See also Rules 1-01, 3-01, and
4-01 of Regulation S-X [17 CFR 210.1-01, 2-01 and 4-01].
\181\ See Exchange Act Section 13(b)(2)(B) [15 U.S.C.
78m(b)(2)(B)]. See also Rules 13a-15 [17 CFR 240.13a-15] and 15d-15
[17 CFR 240.15d-15]. We note, however, that the proposed rules would
not create a new auditing requirement.
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In the 2012 Rules, we stated that ``determinations made pursuant to
the relevant accounting standards applicable for financial reporting
may be indicative of whether control exists, [but] we do not believe it
is determinative in all cases.'' \182\ While the determination of
control under applicable accounting principles is not identical to the
determination under Rule 12b-2, we believe that there is significant
overlap between the entities that an issuer would consolidate under the
applicable accounting standards and the entities that an issuer would
have control over under Rule 12b-2. Taking into account the various
considerations discussed above, we believe that defining the term
``control'' using accounting principles strikes the appropriate balance
between providing reliable and accurate disclosure to support
international transparency promotion efforts and reducing potential
compliance costs for resource extraction issuers.
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\182\ 2012 Adopting Release at 95 [77 FR 56387].
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Request for Comment
20. Should we define the term ``control'' based on applicable
accounting principles, rather than using Rule 12b-2 of the Exchange
Act? Why or why not? If so, should we allow resource extraction
issuers to report eligible payments made by proportionately
consolidated entities on a proportionate basis, as proposed, or
modify this requirement? Please provide your supporting rationale.
Is there some other definition we should use? If so, why?
21. Are there significant differences between the scope of the
entities that would be covered by our proposed rules and by Rule
12b-2? If so, please identify the potential differences and the
types of entities and payments that would be affected. Are there
certain industries, jurisdictions, or project types that may be more
impacted by using the proposed rules' definition of ``control''
rather than the Rule 12b-2 definition?
22. Is there an alternative approach to what we have proposed, other
than using Rule 12b-2, that would better achieve the transparency
objectives of Section 13(q) while minimizing the cost of compliance?
For example, are there any aspects of the EU Directives, ESTMA or
other international transparency initiatives that should be
considered so as to enhance the comparability and consistency of the
disclosed payments? If so, which aspects and why.
23. Are there significant differences between the consolidation
principles in U.S. GAAP and IFRS that could affect the comparability
of the disclosure that would be required by the proposed rules? If
so, is there a way to modify the
[[Page 80075]]
definition of ``control'' to enhance the comparability of the
disclosure?
E. Definition of ``Project''
1. General
Consistent with Section 13(q), the proposed rules would require a
resource extraction issuer to disclose payments made to governments
relating to the commercial development of oil, natural gas, or minerals
by type and total amount per project.\183\ In the 2012 Adopting
Release, the Commission declined to define ``project'' and stated its
belief that not adopting a definition had 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.\184\ After further
consideration of the objectives of the statute and in light of
international transparency developments since adoption of the 2012
Rules, we are proposing to define the term ``project.'' Specifically,
we are proposing a definition modeled on the definition found in the EU
Directives and the ESTMA Specifications; the difference being that the
proposed definition would afford resource extraction issuers additional
flexibility on how to treat operations involving multiple, related
contracts.\185\
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\183\ For commenters supporting project level disclosure, see,
e.g., letters from NACE; PWYP-ZIM; PWYP-IND. These letters provide
examples of situations in which either project-level reporting has
achieved beneficial effects or are necessary to achieving such
effects.
\184\ See the 2012 Adopting Release at 85 [77 FR 56385].
\185\ A number of commenters expressed support for international
consistency and the use of the EU Directives' definition of
``project.'' See letters from Allianz Global Investors (Apr. 28,
2014) (``Allianz 1''); Allianz Global Investors (Aug. 8, 2014)
(``Allianz 2''); Arachnys Information Services (May 28, 2014
(``Arachnys''); Global Witness 2; PWYP 4; and Third Swedish National
Pension Fund (Apr. 28, 2014) (``TSNPF'').
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The EU Directives and ESTMA Specifications both state that a
``project'' means ``the operational activities that are governed by a
single contract, license, lease, concession or similar legal agreements
and form the basis for payment liabilities with a government.
Nonetheless, if multiple such agreements are substantially
interconnected, this shall be considered a project.'' \186\ The EU
Directives and ESTMA Specifications go on to define ``substantially
interconnected'' as ``a set of operationally and geographically
integrated contracts, licenses, leases or concessions or related
agreements with substantially similar terms that are signed with the
government and give rise to payment liabilities.'' \187\
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\186\ Article 41(4) of the EU Accounting Directive; ESTMA
Specifications, Section 2.2.2. ESTMA Specifications defining
``project'' would be promulgated pursuant to Section 9(5) of ESTMA,
which authorizes the Minister to specify the ``way in which payments
are to be organized or broken down in the report--including on a
project basis--and the form and manner in which a report is to be
provided.''
\187\ Recital 45 of the EU Accounting Directive.
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Similar to the EU Directives and the draft Canadian definitions, we
are proposing to define ``project'' as operational activities that are
governed by a single contract, license, lease, concession, or similar
legal agreement, which form the basis for payment liabilities with a
government.\188\ Our proposed definition, also similar to the EU
Directives and the draft Canadian definitions, would allow issuers to
treat multiple agreements that are both operationally and
geographically interconnected as a single project.\189\ Unlike the EU
Directives and draft Canadian definitions, our proposed definition of
``project'' would not include the requirement that the agreements have
``substantially similar terms.'' In that regard, we understand that
operations under one agreement may lead to the parties entering into a
second agreement for operations in a geographically contiguous area. If
a change in market conditions or other circumstances compels a
government to insist on different terms for the second agreement, then
under our proposed definition the use of those different terms by
themselves would not preclude treating the second agreement as the same
project when, operationally and geographically, work under the second
agreement is a continuation of work under the first.
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\188\ See proposed Item 2.01(c)(10) of Form SD.
\189\ Id.
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In order to assist resource extraction issuers in determining
whether two or more agreements may be treated as a single project, we
are proposing an instruction that provides a non-exclusive list of
factors to consider when determining whether agreements are
``operationally and geographically interconnected'' for purposes of the
definition of project, no single one of which would necessarily be
determinative. Those factors include whether the agreements relate to
the same resource and the same or contiguous part of a field, mineral
district, or other geographic area, whether they will be performed by
shared key personnel or with shared equipment, and whether they are
part of the same operating budget.\190\ Furthermore, we are preserving
the approach taken in the 2012 Rules by proposing an instruction
clarifying that issuers would not be required to disaggregate payments
that are made for obligations levied on the issuer at the entity level
rather than the project level.\191\
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\190\ See proposed Instruction 12 to Item 2.01 of Form SD.
\191\ See proposed Instruction 4 to Item 2.01 of Form SD. 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. See also Section II.C.1 above.
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In proposing this approach, we have considered the wide variety of
recommendations provided by commenters, both before and after the 2012
Adopting Release, including defining ``project'' as a reporting unit or
by reference to a materiality standard.\192\ Nevertheless, we see
several advantages to our proposed approach over the alternatives. Our
proposed definition of the term project has the advantage of providing
clarity by stipulating that a project is contract-based.\193\ Also,
taking an approach that shares certain core elements with the
definition used in the EU Directives and the ESTMA Specifications would
further international transparency promotion efforts.\194\ Such an
approach should also reduce costs for companies listed in both the
United States and those jurisdictions by not requiring different
disaggregation of project-related costs due to different definitions of
the term ``project.'' In addition, a definition having substantial
similarities might enable companies to take advantage of equivalency
provisions available in
[[Page 80076]]
other jurisdictions.\195\ We also note that DOI supports a definition
of project at the contract level.\196\
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\192\ For a more extensive discussion of comments received on
the definition of ``project'' prior to the 2012 Adopting Release,
please see Section II.D.3 of the 2012 Adopting Release.
\193\ See 2012 Adopting Release at 85-86 [77 FR 56385].
\194\ See letter from Transparency International-USA (June 9,
2014) (``TI-USA 1''). See also letter from State Department
(``applaud[ing] the EU's enactment of its Accounting and
Transparency Directives and Canada's enactment of its Extractive
Sector Transparency Measure Act'' and explaining that a Commission
rule requiring disclosure ``compatible with these transparency
measures would further advance the United States' foreign policy
interests''). We also note that the EITI's project reporting
disclosure requirements are tied to the European Union and U.S.
definition of project. See EITI Standard, at 31 (``Reporting at
project level is required, provided that it is consistent with the
United States Securities and Exchange Commission rules and the
forthcoming European Union requirements.''). Thus, adopting a
definition of ``project'' similar to that in the EU Directives would
also promote international transparency by aligning EITI compliance
with our proposed rules, the EU Directives, and, if adopted in their
current form, Canada's ESTMA Specifications.
\195\ See, e.g., Article 46 of the EU Accounting Directive;
Section 10(1) of ESTMA.
\196\ See letter from DOI 1. In this regard, DOI noted that it
``interpret[s] this definition to mean that for oil, gas, and
renewables a project is at either the lease or the agreement level
and for coal and other hardrock mining, it would mean that a project
was at the permit, claim, or plan of operation level.''
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While substantially consistent with other international disclosure
regimes in its overall approach, our proposed definition would differ
in one aspect. Specifically, it would provide additional flexibility
compared to those regimes by allowing for aggregation of payments made
for activities that relate to multiple agreements that are both
operationally and geographically interconnected without requiring the
terms of the agreements to be substantially similar. In that respect,
it should reduce the burdens associated with disaggregating payments.
It may also reduce the risk of sensitive information being released,
which should help alleviate concerns about competitive harm and the
security of personnel and assets, while also providing payment
information that is useful to citizens in resource-rich countries.
We also found it significant that several of the alternative
definitions of ``project'' suggested previously by commenters would
likely result in disclosure of payment information that is more greatly
aggregated and less granular than what would be provided by the
definition we are proposing. For example, commenters suggested defining
``project'' at the country level; \197\ defining ``project'' as a
reporting unit; \198\ defining ``project'' in relation to a particular
geologic resource, such as a ``geologic basin'' or ``mineral
district;'' \199\ or defining ``project'' by reference to a materiality
standard.\200\ Each of these approaches, however, would likely result
in disclosure that is more aggregated (and therefore less detailed) on
a geographical basis, and potentially less useful for purposes of
serving the statute's objective of promoting payment transparency to
combat global corruption. As described above, disaggregated information
provides greater transparency to local communities that may seek to
verify that they are receiving payments to which they are
entitled.\201\
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\197\ See letters from API 1; ExxonMobil 1; Petrobras; and Royal
Dutch Shell (Oct. 25, 2010) (``RDS 1'').
\198\ See 2012 Adopting Release, n.283 and accompanying text.
\199\ See 2012 Adopting Release, n.286 and accompanying text.
\200\ See 2012 Adopting Release, n.291 and accompanying text.
\201\ See Section I.E.2.
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2. The API Proposal
In a comment submitted after the 2012 Rules were vacated, and in
subsequent presentations to the staff, API has advanced a proposal that
would ``defin[e] projects according to subnational political
jurisdictions.'' \202\ Under API's proposal, all of an issuer's
resource extraction activities within a subnational political
jurisdiction would be treated as a single ``project'' to the extent
that these activities involve the same resource (e.g., oil, natural
gas, coal) and to the extent that they are extracted in a generally
similar fashion (e.g., onshore or offshore extraction, or surface or
underground mining). To illustrate how its proposed definition would
work, API indicates that all of an issuer's extraction activities
``producing natural gas in Aceh, Indonesia would be identified as
`Natural Gas/Onshore/Indonesia/Aceh.' '' Similarly, API indicates that
``[o]nshore development in the Niger River delta area would be `Oil/
Onshore/Nigeria/Delta.' '' API contends that this approach would be
preferable to a contract-based definition of project, such as the
definition used in the EU Directives or in the proposed rules, because
its proposed definition would provide sufficiently localized
information to help citizens hold their leaders accountable for the
resource wealth generated in their region while also minimizing
competitive harm to resource extraction issuers.
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\202\ See letters from API 6 and American Petroleum Institute
(Apr. 15, 2014) (``API 7'').
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For several reasons, we are not proposing such a definition of
``project.'' First, we do not agree that engaging in similar extraction
activities across a single subnational political jurisdiction provides
the type of defining feature to justify aggregating those various
activities together as a solitary project. To put this in perspective
using API's own illustrations, API's proposed definition would treat
every natural gas extraction well that an issuer may have drilled
across the 22,500 square miles of Aceh, Indonesia--a territory that is
slightly larger than the total land area of the States of Massachusetts
and Maryland--as a solitary project, primarily because those wells have
been drilled in the same subnational political jurisdiction. Similarly,
under API's proposed definition, every oil well that an issuer drills
across the approximately 27,000 square miles of the Niger Delta--a
territory that is slightly larger than the total land area of the
States of West Virginia and Delaware--would be a single project.\203\
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\203\ For a visual representation of how the disclosure under
the API Proposal would contrast with the more localized, granular
disclosure under our proposed rules, compare, for example, this map
of the entire Niger Delta (https://www.stratfor.com/image/niger-delta-oil-fields (last visited Dec. 8, 2015)) with this map of Niger
Delta oil concessions (http://www.nigeria-oil-gas.com/nigeria_oil_&_gas_concessions_map_&_licenses-34-1-2-c.html (last
visited Dec. 8, 2015)).
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Although a resource extraction issuer could enter into a contract
that covers an entire country or subnational political jurisdiction, it
is our understanding that this is not common industry practice.\204\
Rather, the typical contract area for oil and gas exploration is
between approximately 400 to 2000 square miles.\205\ Indeed, a typical
U.S. oil and gas offshore federal lease covers approximately three
square miles.\206\ Also, a variety of oil and gas concessions maps show
that such concessions are generally significantly smaller than major
subnational political jurisdictions.\207\ Similarly, mining concessions
are generally significantly smaller than major subnational
jurisdictions. In fact, we understand that development and production
contracts, which are generally entered into only after successful
exploration and which generate the majority of revenue payments,\208\
will typically cover only a single mine.\209\ Accordingly, we believe
[[Page 80077]]
that for oil, gas and minerals, a contract-based definition of
``project'' would provide more granular disclosure than API's proposed
definition and similar definitions focusing on national or subnational
political jurisdictions.\210\
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\204\ See Center for Economic and Management, Oil and Gas
Exploration and Production, Reserves, Costs, and Contracts, Institut
Francais Du Petrole Publications (2004), Ch. 5 (``Oil and Gas
Exploration''). The oil and gas and mining engineers on the
Commission's staff, based on their collective industry experience,
also confirm their understanding of industry practice.
\205\ Oil and Gas Exploration, 183-84.
\206\ See, e.g., U.S. Outer Continental Shelf Lease Blocks
available at http://www.arcgis.com/home/.html?id=0d6b1a589b814fa58ba66aadcc0b1c65 (last visited Dec. 8,
2015).
\207\ See, e.g., letter from Oxfam America (Dec. 3, 2015)
(``Oxfam 3'') (including a Sonangol map of Angola Concession and a
2014 West Africa Offshore Oil and Gas Concession Map); Brazil 2011
Oil and Gas Concession Map, Offshore Magazine available at http://www.offshore-mag.com/content/dam/etc/medialib/platform-7/offshore/maps-and_posters/BrazilMap2011-062111Ads.pdf (last visited Dec. 8,
2015).
\208\ While mineral exploration rights are subject to government
leases, they do not yield significant payments to governments. See
generally Diana Dalton, A Global Perspective on Mining Legislation,
in 1 SME Mining Engineering Handbook 331-337 (P. Darling ed.) (2011)
and A. Nunan, Understanding Overlaps--Mining Tenure Versus the Rest
of the World, The AusIMM New Leaders' Conference Brisbane, QLD (May
2007).
\209\ Although the size of a mining project can vary, and a
single mining project can cover several contiguous exploration
blocks, even large mining projects are still significantly smaller
than a major subnational jurisdiction or a mining district. For
example, Vulcan Materials Company's McCook Quarry in Chicago,
Illinois, a large limestone quarry, covers approximately one square
mile. See NPDES Permit No. ILG840200 available at http://www.epa.state.il.us/water/permits/non-coal-mines/show-file.php?recordID=137. Freeport-McMoRan Inc.'s Morenci copper mine
in Morenci, Arizona, a large copper mine, covers approximately 102
square miles. Freeport-McMoRan Inc., Form 10-K (FYE Dec. 31, 2014)
at 8. AngloGold Ashanti's Iduapriem Mine, a small to medium gold
mine, covers approximately 13 square miles. AngloGold Ashanti
Limited, Form 20-F (FYE Dec. 31, 2014) at 59.
\210\ Although contract areas are often larger during the
exploration phase when the presence of economically viable resources
is less certain, such areas are significantly reduced when the
exploration contract is extended or when the contract holder enters
the exploitation phase of a project. Oil & Gas Exploration, 183-86.
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Moreover, by so heavily focusing on subnational political
jurisdictions as a defining consideration, API's definition appears to
disregard the economic and operational considerations that we believe
would more typically--and more appropriately--be relevant to
determining whether an issuer's various extraction operations should be
treated together as one project. This stands in contrast to the
definition of ``project'' under the EU Directives and the ESTMA
Specifications. Second, API's proposal would not generate the level of
transparency that, as discussed above in Section I.E, we believe would
be necessary and appropriate to achieve the U.S. Government's
anticorruption and transparency objectives.\211\ By permitting
companies to aggregate their oil, natural gas, and other extraction
activities over large territories, API's definition would not provide
local communities with payment information at the level of granularity
necessary to enable them to know what funds are being generated from
the extraction activities in their particular areas.\212\ Again, to put
this in context using API's illustrations, in Aceh there are eight
separate regions and five autonomous cities; the approximately 4
million residents of these areas within Aceh would not be able to
distinguish which revenues came from their local projects versus
projects in other areas of Aceh. Much the same would be true for the
nearly 30 million people that occupy the nine separate states within
the Niger River Delta. As a result, the local residents in Aceh and the
Niger Delta would be unable to ensure that they are receiving the funds
from the national and subnational government that they might be
entitled to, either under law or other governing arrangements.\213\
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\211\ See Letter from Global Witness 2. See also, e.g., Natural
Resource Governance Institute (Sept. 23, 2015) (``NRGI'') (stating
that API's approach ``would prevent investors or citizens from using
disclosed project-level data in conjunction with annual reports or
other publicly available information'' and ``make it difficult for
citizens to identify the payments related to an actual project, . .
. preventing stakeholders from using such disclosures to inform risk
analyses or carry our monitoring and oversight activities.'')
(emphasis in original); Iraqi Transparency Alliance (``We recommend
that the definition of project align with the August 2012 SEC rule
or the EU Accounting and Transparency Directives, and that the SEC
rejects the American Petroleum Institute's reporting proposal,
which, in particular by failing to identify which companies made
which payments, would render such obscure information useless.'');
PWYP-IND (``The American Petroleum Institute proposes to report at
the first tier below the central government. In my country, that
would mean that companies would report how much they paid for access
to resources in each province. Clearly, such a reporting scheme
would prove completely unsatisfactory in Indonesia, as it would
leave citizens in producing and adjacent districts with no way to
know whether their district governments received the money they were
owed.'').
\212\ See letter from NACE (``Project level payment data is also
necessary to enable communities to conduct an informed cost-benefit
analysis of the projects in their backyards. . . . For local
communities affected by extractives projects, knowledge of the
total, combined amount a company has paid the government for all
extractives projects is of little value; what matters most to a
community is the revenue generated from the specific projects in its
backyard. When a single company operates multiple projects, as
commonly occurs in Sierra Leone, community oversight becomes nearly
impossible without data on each specific project.'').
\213\ See also letter from PWYP-CAM (``The Cameroonian Mining
Code states that the municipality and local communities are entitled
to 25 percent of the Ad Valorem tax and Extraction tax paid by
companies for the projects located in their jurisdiction. These
payments are collected by the central tax authorities and then
transferred to the municipal councils. Of the 25 percent of these
payments allocated to the municipal councils, 15 percent is for the
municipal council and 10 percent is for the local populations
directly affected by the extractive operations. However, without
project-level fiscal data, local populations will not be able to
cross-check whether or not they are receiving the share of revenues
they are legally entitled to.'').
---------------------------------------------------------------------------
Similarly, local communities (and others assisting them) would be
unable to assess certain costs and benefits of particular licenses and
leases to help ensure that the national government or the subnational
government had not struck a corrupt or otherwise inappropriate
arrangement, and these local residents would be unable to meaningfully
compare the revenues from the individual extraction efforts within the
subnational jurisdiction to potentially verify that companies were
paying a fair price for the concessions. Further, aggregating the
extraction activities into a single project could undercut the
deterrent effect that governmental officials and companies would
experience; as discussed above, the more detailed and disaggregated the
project-level disclosures, the greater likelihood that unlawful misuse
of those funds may be deterred or detected.\214\
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\214\ We note that API's proposal suffers from an additional
substantial defect in our view. Under API's proposal, the project-
level disclosures that companies would make in their filings to the
Commission would not be publicly released. Instead, these
disclosures would be electronically aggregated and anonymized, and
only then made publicly available. This would further undermine the
effectiveness of the public disclosures in promoting the U.S.
Government's foreign policy goals. See generally letter from NRGI
(noting that in the East Kalimantan Province of Indonesia there are
five U.S. listed companies with as many as 11 different production
sharing contracts that could all be identified as ``Indonesia/
Offshore/Oil/East Kalimantan.'').
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We acknowledge that API's definition of ``project'' could lower the
potential for competitive harm when compared to our proposed approach,
which requires public disclosure of contract-level data. Nevertheless,
as we discuss below,\215\ we believe that the potential for competitive
harm resulting from our proposed disclosure requirements is
significantly reduced due to the recent adoption of a similar
definition of ``project'' in the European Union and the recent proposal
of a similar definition in Canada. As discussed above, we also believe
that a disclosure requirement that is in accordance with the emerging
international transparency regime is consistent with Section 13(q) and
its legislative history. Thus, we believe that the definition of
project that we are proposing is, on balance, necessary and appropriate
notwithstanding the potential competitive concerns that may result in
some instances.\216\
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\215\ See Section III.B.2.c below.
\216\ In this regard, and as we discuss in Section II.G.3 below,
we will consider using our existing authority under the Exchange Act
to provide exemptive relief at the request of a resource extraction
issuer, if and when warranted. We believe that this case-by-case
approach to exemptive relief would permit us to tailor any relief to
the particular facts and circumstances presented, which could
include facts related to potential competitive harm.
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Request for Comment
24. Should we, as proposed, define ``project'' as operational
activities that are governed by a single contract, license, lease,
concession, or similar legal agreement, which form the basis for
payment liabilities with a government? Why or why not? Given the
U.S. foreign policy interests reflected in Section 13(q), does our
proposed definition advance the governmental interests in promoting
transparency and combatting global corruption? Should we define
``project'' in a different manner? If yes, how should we define the
term? For example, should we adopt a definition of ``project'' that
is identical to that found in the EU Directives and the ESTMA
Specifications?
25. Is there an alternative to using a contract based definition
of ``project'' that
[[Page 80078]]
would promote international transparency while mitigating compliance
costs to resource extraction issuers?
26. Would our proposed contract-based definition of ``project''
lead to more granular disclosure than API's suggested definition?
What is the typical geopolitical and geographic scope of contracts
in the resource extraction industry? Are the examples discussed
above representative of current industry practice?
27. Should we permit two or more agreements that are both
operationally and geographically interconnected to be treated by the
issuer as a single project, as proposed? What are the advantages or
disadvantages of such a treatment? Should we instead require that
these agreements have substantially similar terms as in the EU
Directives and the ESTMA Specifications?
28. Should we use another jurisdiction's definition of
``project'' or one suggested by commenters, such as API? If so,
which definition and why?
29. Would defining ``project'' in the manner we are proposing,
or a similar manner, allow for comparability of data among issuers?
How could the proposed rules be changed to improve such
comparability?
30. Should we adopt the approach we took in the 2012 Rules and
not define ``project?'' If so, please explain why.
F. Definition of ``Foreign Government'' and ``Federal Government''
In Section 13(q), Congress defined ``foreign government'' to mean a
foreign government, a department, agency, or instrumentality of a
foreign government, or a company owned by a foreign government, while
granting the Commission the authority to determine the scope of the
definition.\217\ Consistent with the 2012 Rules, we are proposing a
definition of ``foreign government'' that would include a foreign
national government as well as a foreign subnational government, such
as the government of a state, province, county, district, municipality,
or territory under a foreign national government.\218\ Although we
acknowledge the concerns of commenters who suggested limiting the
definition of foreign government to foreign national governments,\219\
we believe that the definition also should include foreign subnational
governments. The proposed definition is consistent with Section 13(q),
which requires an issuer to identify, for each disclosed payment, the
government that received the payment and the country in which the
government is located.\220\ It is also consistent with the EU
Directives, ESTMA Guidance, and the EITI.\221\
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\217\ 15 U.S.C. 78m(q)(1)(B).
\218\ See proposed Item 2.01(c)(7) of Form SD.
\219\ See, e.g., letter from Statoil (stating that requiring
disclosure of payments to national governments only would be more
fair and consistent with other international transparency
initiatives).
\220\ See 15 U.S.C. 78m(q)(2)(D)(ii)(V).
\221\ See EU Accounting Directive, Article 41(3) (``Government
means any national, regional or local authority . . .''); ESTMA
Guidance, Section 3.2 (``[A] Payee is . . . any government . . . at
a national, regional, state/provincial or local/municipal level . .
.''); EITI Standard, at 29 (requiring the disclosure and
reconciliation of material payments to subnational government
entities in an EITI Report).
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For purposes of identifying the foreign governments (as defined in
proposed Item 2.01(c) of Form SD) that received the payments, as
required by proposed Item 2.01(a)(7) of Form SD, we believe that an
issuer should identify the administrative or political level of
subnational government that is entitled to a payment under the relevant
contract or foreign law. As noted in the 2012 Adopting Release, if a
resource 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 would be covered under the proposed rules.
Additionally, the proposed rules clarify that a company owned by a
foreign government means a company that is at least majority-owned by a
foreign government.\222\ This clarification should address the concerns
that some commenters had about when an issuer would be required to
disclose payments made to a foreign government-owned company.
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\222\ See proposed Item 2.01(c)(7) of Form SD.
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The proposed rules also clarify that ``Federal Government'' means
the United States Federal Government.\223\ Although we acknowledge that
the European Union and Canada have taken different approaches by
requiring or proposing to require the disclosure of payments to
domestic subnational governments, 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 our previous releases, 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.\224\
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\223\ See proposed Item 2.01(a) of Form SD.
\224\ 2012 Adopting Release at 101 [77 FR 56389]; 2010 Proposing
Release at 44 [75 FR 80988].
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Request for Comment
31. Should the definition of ``foreign government'' include a
foreign government, a department, agency, or instrumentality of a
foreign government, or a company owned by a foreign government, as
proposed? If not, why not? Should it include anything else?
32. Under Section 13(q) and the proposal, the definition of
``foreign government'' includes ``a company owned by a foreign
government.'' We are proposing to include an instruction in the
rules clarifying that a company owned by a foreign government is a
company that is at least majority-owned by a foreign government.
Should we provide this clarification in the rules? Should a company
be considered to be owned by a foreign government if government
ownership is less than majority-ownership? Should the rules provide
that a company is owned by a foreign government if government
ownership is greater than majority-ownership? If so, what level of
ownership would be appropriate and why? Are there some levels of
ownership of companies by a foreign government that should be
included in or excluded from the proposed definition of ``foreign
government?''
33. Are there some levels of subnational government that should
be excluded from the proposed definition of foreign government? If
so, please explain why and provide specific examples of those levels
of subnational government that should be excluded.
34. Should we provide any additional guidance on the statutory
terms ``foreign government'' and ``Federal Government?'' If so, what
guidance would be helpful?
G. Disclosure Required and Form of Disclosure
1. Annual Report Requirement
Section 13(q) mandates that a resource extraction issuer provide
the payment disclosure required by that section in an annual report but
otherwise does not specify the location of the disclosure, either in
terms of a specific form or in terms of location within a form.
Consistent with the approach in the 2012 Rules, we believe that
resource extraction issuers should provide the required disclosure
about payments on Form SD.
Form SD is already used for specialized disclosure not included
within an issuer's periodic or current reports, such as the disclosure
required by the rule implementing Section 1502 of the Act.\225\ We also
believe that using Form SD would facilitate interested parties' ability
to locate the disclosure and address issuers' concerns about providing
the disclosure in their Exchange Act annual reports on Forms 10-K, 20-
F, or 40-F.\226\ For example,
[[Page 80079]]
requiring the disclosure in a separate form, 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 \227\ and would allow the
Commission, as discussed below, to adjust the timing of the submission
without directly affecting the broader Exchange Act disclosure
framework.\228\ As proposed, Form SD would 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
readers to the detailed payment information provided in the exhibits to
the form.
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\225\ Rule 13p-1 [17 CFR 240.13p-1]. See also Exchange Act
Release No. 34-67716 (Aug. 22, 2012), 77 FR 56273 (Sept. 12, 2012)
(``Conflict Minerals Release'').
\226\ See also 2012 Adopting Release, nn.366-370 and
accompanying text. Under the rules proposed in the 2010 Proposing
Release, a resource extraction issuer would have been required to
furnish the payment information in its annual report on Form 10-K,
Form 20-F, or Form 40-F. Certain commenters continue to support this
approach. See letter from Susan Rose-Ackerman (Mar. 28, 2014)
(``Ackerman'') (``[t]here is no need for the cost of a separate
report.'').
\227\ See 2012 Adopting Release, n.369.
\228\ In this regard, we considered permitting the resource
extraction payment disclosure to be filed in an amendment to Form
10-K, 20-F, or 40-F, as applicable, but we are concerned that this
might give the false impression that a correction had been made to a
previous filing. See also 2012 Adopting Release, n.379 and
accompanying text.
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In addition to considering allowing issuers to use Forms 10-K, 20-
F, or 40-F, we also considered commenters' suggestions that we require
the disclosure on Form 8-K or Form 6-K.\229\ We are not proposing that
approach, however, because we agree with those commenters who observed
that the resource extraction payment disclosure differs from the
disclosure required by Form 8-K or 6-K.\230\ In this regard, we note
that Section 13(q) requires that the disclosure be provided in an
annual report rather than on a more rapid basis, unlike the disclosure
of material corporate events, which must be filed on a ``current''
basis using Form 8-K or 6-K.\231\
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\229\ See 2012 Adopting Release, n.371 and accompanying text.
\230\ See, e.g., letter from Calvert 1.
\231\ 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].
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While Section 13(q) mandates that a resource extraction issuer
include the relevant payment disclosure in an ``annual report,'' it
does not specifically mandate the time period in which a resource
extraction issuer must provide the disclosure. Although two commenters
on the 2010 Proposing Release believed that the reporting period for
the resource extraction disclosure should be the calendar year,\232\
two other commenters suggested that the reporting period for Form SD
should be the fiscal year.\233\ We also considered the possibility that
certain resource extraction issuers may be required to file two reports
on Form SD every year if we use a reporting period based on the fiscal
year and they are also subject to the May 31st conflict minerals
disclosure deadline.\234\ Despite the suggestions of certain commenters
and our consideration of the conflict minerals disclosure requirements,
we believe that the fiscal year is the more appropriate reporting
period for the payment disclosure. We believe it would reduce resource
extraction issuers' compliance costs when compared to a fixed, annual
reporting requirement by allowing them to use their existing tracking
and reporting systems for their public reports to also track and report
payments under Section 13(q). Also, although minimizing the number of
Form SD filings an issuer would need to make if it was also subject to
the conflict minerals disclosure rules could have benefits, we do not
believe that those benefits outweigh those arising from a reporting
regime tailored to a resource extraction issuer's fiscal year.\235\
Finally, we note that ESTMA and the EU Directives also require
reporting based on the fiscal year, with ESTMA using the same deadline
contained in the proposed rules.\236\
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\232\ See letters from API 1 and ExxonMobil 1.
\233\ See letters from AngloGold and RDS 2.
\234\ General Instruction B.1 of Form SD. See also Exchange Act
Rule 13p-1.
\235\ Of the 877 companies that we estimate would be subject to
the proposed rules, only 56 filed a Form SD pursuant to Rule 13p-1
in 2014. Out of those, all but two have a fiscal year end of
December 31, which would mean that the filing deadline under the
proposed rules would be very similar to the deadline under Rule 13p-
1, increasing the likelihood that one report could be filed each
year. Finally, we note that the conflict minerals reporting regime
adopted a uniform reporting period, in part, because such a period
allows component suppliers that are part of a manufacturer's supply
chain to provide reports to their upstream purchasers only once a
year. See Conflict Minerals Release, n.351 and accompanying text.
The same reasoning would not apply to the issuer-driven disclosure
under the proposed rules.
\236\ See ESTMA, Section 9(1) (``Every entity must, not later
than 150 days after the end of each of its financial years, provide
the Minister with a report that discloses, in accordance with this
section, the payments that it has made during that year.''); EU
Accounting Directive, Article 43(2) (``The report shall disclose the
following information . . . in respect of the relevant financial
year.''); EU Transparency Directive, Article 6 (``The report shall
be made public at the latest six months after the end of each
financial year. . . .'').
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After considering the comments expressing concern over the
difficulty of providing the payment disclosure within the current
annual reporting cycle,\237\ we believe it is reasonable to provide a
filing deadline for Form SD that is later than the filing deadline for
an issuer's annual report under the Exchange Act. Therefore, consistent
with the approach under ESTMA and some commenters' suggestions,\238\
the proposed rules would 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.\239\
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\237\ See 2012 Adopting Release, n.367 and accompanying text.
\238\ See 2012 Adopting Release, nn.375-377 and accompanying
text.
\239\ See proposed General Instruction B.2 to Form SD.
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Request for Comment
35. Section 13(q) requires disclosure of the payment information
in an annual report but does not specify the type of annual report.
Should we require resource extraction issuers to provide the payment
disclosure mandated under Section 13(q) on Form SD, as proposed?
Should we require, or permit, resource extraction issuers to provide
the payment information in an annual report on Forms 10-K, 20-F, or
40-F or on a different form? What would be the costs and benefits of
each approach for users of the information or resource extraction
issuers?
36. Should the proposed disclosure be subject to the officer
certifications required by Exchange Act Rules 13a-14 and 15d-14 or a
similar requirement? Why or why not?
37. As noted above, Section 13(q) mandates that a resource
extraction issuer provide the required payment disclosure in an
annual report, but it does not specifically mandate the time period
for which a resource extraction issuer must provide the disclosure.
Is it reasonable to require resource extraction issuers to provide
the mandated payment information for the fiscal year covered by the
applicable annual report, as proposed? Why or why not? Should the
rules instead require disclosure of payments made by resource
extraction issuers during the most recent calendar year?
38. Should the filing deadline for Form SD be 150 days after the
end of the most recent fiscal year as proposed? Should it be longer
or shorter? Should issuers be able to apply for an extension on a
case-by-case basis? Or should there be a provision for an automatic
extension with or without a showing of cause? Should we amend
Exchange Act Rule 12b-25 \240\ to allow it to be used for an
extension for Form SD filings?
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\240\ 17 CFR 240.12b-25.
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39. Should the proposed rules provide an accommodation to filers
that are subject to both Rules 13p-1 and 13q-1, such as an
alternative filing deadline, to minimize the possibility that a
resource extraction issuer would be required to file two Form SD
filings in the same year? If so, how should that deadline be
structured?
2. Public Filing
As noted in the U.S. District Court for the District of Columbia's
opinion discussed above, Section 13(q) provides us with the discretion
to determine whether or not we should require public
[[Page 80080]]
disclosure of payments by resource extraction issuers or permit
confidential filings and provide a public aggregation of this
disclosure. Consistent with the 2012 Rules, we believe that requiring
public disclosure would best accomplish the purpose of the statute.
Therefore, as supported by numerous commenters, the proposed rules
would require issuers to disclose the full payment information
publicly, including the identity of the issuer.\241\
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\241\ See letters from Allianz 1; Allianz 2; Africa Faith and
Justice Network (Aug. 8. 2014) (``AFJN''); Calvert Investment
Management (Nov. 25, 2013) (``Calvert 2''); CSCU; EarthRights
International (Dec. 12, 2012) (``ERI 4''); First Swedish National
Pension Fund (May 9, 2015) (``FSNPF''); Francine Cronshaw (Mar. 27,
2015) (``Cronshaw''); Global Witness 2; Global Witness (June 27,
2014) (``Global Witness 4''); Kathlein Reimer (June 10, 2014)
(``Reimer''); Michael Ross (May 21, 2014) (``Ross''); OSISA-A; Oxfam
America (Sep. 26, 2013) (``Oxfam 2''); PWYP 4; Publish What You Pay
Coalition (``PWYP 5'') (Apr. 14, 2014); PWYP-CAM; Publish What You
Pay Canada (Jan. 8, 2014) (``PWYP-CAN''); PWYP-IND; Publish What You
Pay United States (Feb 13, 2015) (``PWYP-US''); PWYP-ZIM; Rep. Water
and 58 other members of congress (June 11, 2014) (``Rep. Waters et
al.''); Senators Cardin, Leaky, Lugar, Levin, Markey (Aug. 2, 2013)
(``Sen. Cardin et al. 2''); Senators Cardin, Levin, Leahy, Markey,
Sanders, Durbin, Johnson, Whitehouse, Merkley, Boxer, Blumenthal,
Shumer (May 1, 2015) (``Sen. Cardin et al. 3''); SNS Asset
Management (July 31, 2013) (``SNS''); TI-USA 1; TSNPF.
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In response to the 2010 Proposing Release and the court's order to
vacate the 2012 Rules, several commenters suggested permitting issuers
to submit the payment disclosure confidentially.\242\ According to
these commenters, the statute does not expressly require the submitted
information itself to be publicly available. Instead, they asserted
that Section 13(q)(3), which is entitled ``Public Availability of
Information,'' requires us, to the extent practicable, to make public a
compilation of the information that is required to be submitted. These
commenters stated that the Commission could permit the required
information to be submitted confidentially and then prepare a public
compilation aggregating that information on a per-country or similarly
high-level basis, which they contend would both satisfy the specific
text of the statute and fulfill the underlying goal of promoting the
international transparency regime of the EITI.\243\ Other commenters
disagreed with that interpretation of Section 13(q). One stated that
any aggregated 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.'' \244\ Other commenters felt
that a compilation with aggregated data would provide little value to
those seeking to use the information.\245\
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\242\ See letters from API 1; API 6; API 7; Chevron Corporation
(Jan. 28, 2011) (``Chevron 1''); ExxonMobil 1; Nexen Inc. (Mar. 2,
2011) (``Nexen''); and RDS 2.
\243\ See id.
\244\ Letter from Sen. Cardin et al. 1.
\245\ See, e.g., letters from Oxfam 2 (``A compilation that
presents data a high level of aggregation . . . would be largely
worthless to . . . citizens seeking to use the information. . . .'')
and Global Witness 2 (``The Commission should justify detailed
public disclosure by looking to the needs of the users of this data,
including . . . transparency advocates.'').
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Recognizing the purposes of Section 13(q) and the discretion
provided in the statute, and taking into account the views expressed by
various commenters, we are proposing to require resource extraction
issuers to provide the required disclosure publicly. Several factors
support this approach. First, the statute requires us to adopt rules
that further the interests of international transparency promotion
efforts, to the extent practicable.\246\ We note, in this regard, that
several existing transparency regimes require public disclosure,
including the identity of the issuer, without exception.\247\ A public
disclosure requirement under Section 13(q) would further the U.S.
foreign policy interest in supporting international transparency
promotion efforts by enhancing comparability among companies, as it
would increase the total number of companies that provide project-level
public disclosure. It would also be consistent with the objective of
ensuring that the United States is a global ``leader in creating a new
standard for revenue transparency in the extractive industries.'' \248\
In addition, the United States is currently a candidate country under
the EITI, which requires candidate countries to provide a framework for
public, company-by-company disclosure in the EITI report. Permitting
issuers to provide the required payment disclosure on a confidential
basis could undermine the efforts of the USEITI to establish a
voluntary payment disclosure regime for domestic operations. Moreover,
the fact that issuers would be required by these other transparency
promotion efforts to disclose publicly substantially the same payment
information reduces the likelihood that the payment information would
be confidential or that its disclosure would cause competitive harm.
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\246\ Section 13(q)(2)(E).
\247\ See, e.g., the EU Directives.
\248\ 156 CONG. REC. S5873 (July 15, 2010) (Statement of Senator
Cardin); id. at S3815 (May 17, 2010) (Statement of Senator Cardin)
(describing Congress's intention to create ``a historic transparency
standard that will pierce the veil of secrecy that fosters so much
corruption and instability in resource-rich countries'').
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Furthermore, we believe that requiring public disclosure of the
information required to be submitted under the statute is supported by
the text, structure, and legislative history of Section 13(q). In our
view, our exercise of discretion in this manner is consistent with the
statute's use of the term ``annual report,'' which is typically a
publicly filed document, and Congress's inclusion of the statute in the
Exchange Act, which generally operates through a mechanism of public
disclosure.\249\ We also observe that Section 13(q) requires issuers to
disclose detailed information in a number of categories, marked by
electronic data tags, without specifying any particular role for the
Commission in using that information or those data tags. We believe
that this is a further indication that Congress intended for the
information to be made publicly available. In addition, we believe that
providing an issuer's Form SD filings to the public through the
searchable, online EDGAR system, which would enable users of the
information to produce their own up-to-date compilations in real time,
is both consistent with the goals of the statute and the Commission's
obligation, to the extent practicable, to ``make available online, to
the public, a compilation of the information required to be submitted''
by issuers. Finally, neither the statute's text nor legislative history
includes any suggestion that the required payment disclosure should be
confidential. In fact, the legislative history supports our view that
the information submitted under the statute should be publicly
disclosed.\250\
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\249\ The Exchange Act is fundamentally a public disclosure
statute. See generally Schreiber v. Burlington Northern, Inc., 472
U.S. 1, 12 (1985) (``the core mechanism'' is ``sweeping disclosure
requirements'' that allow ``shareholder choice''); Longman v. Food
Lion, Inc., 197 F.3d 675, 682 (4th Cir. 1999) (embodies a
``philosophy of public disclosure''); Franklin v. Kaypro Corp., 884
F.2d 1222, 1227 (9th Cir. 1987) (``forc[es] public disclosure of
facts''). Accordingly, the reports that public companies are
required to submit under the Act--such as the annual report on Form
10-K giving a comprehensive description of a public company's
performance--have always been made public. Adding a new disclosure
requirement to the Exchange Act, and doing so for the clear purpose
of fostering increased transparency and public awareness, is a
strong indication that Congress intended for the disclosed
information to be made public.
\250\ See, e.g., 156 CONG. REC. S3976 (May 19, 2010) (Statement
of Senator Feingold) (``This amendment would require companies
listed on U.S. stock exchanges to disclose in their SEC filings
extractive payments made to foreign governments for oil, gas, and
mining. This information would then be made public, empowering
citizens in resource-rich countries in their efforts to combat
corruption and hold their governments accountable.''); id. at S5872
(July 15, 2010) (Sen. Cardin) (``This [amendment] will require
public disclosure of those payments.''); see also id. at S3649 (May
12, 2010) (proposed ``sense of Congress'' accompanying amendment
that became Section 13(q)) (encouraging the President to ``work with
foreign governments'' to establish their own ``domestic requirements
that companies under [their jurisdiction] publicly disclose any
payments made to a government'' for resource extraction) (emphasis
added); id. at H5199 (June 29, 2010) (Joint Explanatory Statement of
the Committee of Conference) (the amendment ``requires public
disclosure to the SEC of any payment relating to the commercial
development of oil, natural gas, and minerals'') (emphasis added).
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[[Page 80081]]
We note that some commenters sought an exemption from public
disclosure for circumstances in which an issuer believes that
disclosure might jeopardize the safety and security of its employees
and operations.\251\ Other commenters opposed such an exemption and
noted their belief that increased transparency would instead increase
safety for employees.\252\ Several commenters also supported an
exemption from public disclosure for situations where a resource
extraction issuer is subject to a contractual confidentiality clause,
or when such disclosure would jeopardize competitively sensitive
information.\253\
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\251\ See 2012 Adopting Release, n.69 and accompanying text.
\252\ See 2012 Adopting Release, n.70 and accompanying text.
\253\ See letters from American Exploration and Production
Council (Jan. 31, 2011) (``AXPC''); API 1; Chamber of Commerce
Institute for 21st Century Energy (Mar. 2, 2011) (``Chamber Energy
Institute''); Chevron 1; ExxonMobil 1; International Association of
Oil and Gas Producers (Jan. 27, 2011) (``IAOGP''); Local Authority
Pension Fund Forum (Jan. 31, 2011) (``LAPFF''); NMA 2; Rio Tinto;
RDS 2; and United States Council for International Business (Feb. 4,
2011) (``USCIB'').
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As more fully discussed in the 2012 Adopting Release, we are
unpersuaded that these concerns warrant a blanket or per se
exemption.\254\ We emphasize, however, that existing exemptive
authority under Section 12(h) or 36(a) of the Exchange Act provide us
with the ability to address, on a case by case basis, any situations
where confidential treatment may be warranted based upon the specific
facts and circumstances, as discussed below.
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\254\ See, e.g., 2012 Adopting Release at Section II.B. See also
letter from OpenOil UG (Oct. 26, 2015) (``OpenOil'').
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In sum, we believe that the purpose of Section 13(q) is best served
when public disclosure is provided that enables citizens in resource-
rich countries to hold their governments accountable for the wealth
generated by those resources.\255\ Permitting issuers to submit payment
information confidentially would not support, and in fact could
undercut, that statutory purpose.
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\255\ See 156 CONG. REC. at S3816 (Statement of Senator Lugar).
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Request for Comment
40. Should the rules permit an issuer to submit the required
payment disclosure on a confidential basis? Why or why not?
41. Should the rules provide an exemption from public disclosure
for existing or future agreements that contain confidentiality
provisions? Would such an exemption be consistent with the purpose
of Section 13(q) or would it frustrate it? Would it be necessary or
appropriate in the public interest and consistent with the
protection of investors?
42. Are there circumstances in which the disclosure of the
required payment information would jeopardize the safety and
security of a resource extraction issuer's operations or employees?
If so, should the rules provide an exemption for those
circumstances?
43. Are there any other circumstances in which we should provide
an exemption from the public disclosure requirement? For instance,
should we provide an exemption for competitively sensitive
information, or when disclosure would cause a resource extraction
issuer to breach a contractual obligation?
44. If issuers are permitted to provide certain information on a
confidential basis, should such issuers also be required to publicly
file certain aggregate information? Should the Commission consider
such an approach? What would be the costs and benefits of this
approach?
3. Exemption From Compliance
Many commenters supported an exemption from the disclosure
requirements when the required payment disclosure is prohibited under
the host country's laws.\256\ Some commenters 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,\257\ although other commenters challenged those
statements.\258\ Two commenters maintained that the comity principles
of international law require the Commission to construe the disclosure
requirements of Section 13(q) in a manner that avoids conflicts with
foreign law.\259\ One commenter 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.'' \260\ Some
commenters further suggested that failure to adopt such an exemption
could encourage foreign issuers to deregister from the U.S. market
\261\ and would adversely affect investors, efficiency, competition,
and capital formation.\262\
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\256\ See letters from API 1; API (Aug. 11, 2011) (``API 2'');
API (May 18, 2012) (``API 5''); 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 (Mar. 4, 2011) (``Chairman Bachus
and Chairman Miller''); Barrick Gold; BP 1; Chamber Energy
Institute; Chevron 1; Cleary; ExxonMobil 1; ExxonMobil (Mar. 15,
2011) (``ExxonMobil 2''); IAOGP; NMA 2; NYSBA Committee; Nexen;
PetroChina; Petrobras; PricewaterhouseCoopers LLP (Mar. 2, 2011)
(``PWC''); Rio Tinto; RDS 2; Royal Dutch Shell (May 17, 2011) (``RDS
3''); Royal Dutch Shell (Aug. 1, 2011) (``RDS 4''); Senator Lisa
Murkowski and Senator John Cornyn (Feb. 28, 2012) (``Sen. Murkowski
and Sen. Cornyn''); Split Rock International, Inc. (Mar. 1, 2011)
(``Split Rock''); Statoil; Talisman Energy Inc. (June 23, 2011)
(``Talisman''); and Vale S.A. (Mar. 2, 2011) (``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 (Nov. 5, 2010) (``Cravath et al.'').
\257\ See letters from API 1 and ExxonMobil 1. See also letter
from RDS 2 (mentioning China, Cameroon, and Qatar).
\258\ See note 263 below.
\259\ See letters from API 5 and NMA 2.
\260\ 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).
\261\ See letters from Cleary; RDS 1; Split Rock; and Statoil.
See also letter from Branden Carl Berns (Dec. 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)).
\262\ See, e.g., letters from API 1; ExxonMobil 1; and RDS 2.
See also letter from API 5. Several commenters noted that we have a
statutory duty to consider efficiency, competition, and capital
formation when adopting rules. See letter from API (Jan. 19, 2012)
(``API 3''); Cravath et al.; Senator Mary L. Landrieu (Mar. 6, 2012)
(``Sen. Landrieu''); and Sen. Murkowski and Sen. Cornyn.
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Other commenters opposed an exemption for foreign laws that
prohibits disclosure of payment information.\263\ Some commenters
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.\264\
[[Page 80082]]
Commenters also disputed the assertion that there are foreign laws that
specifically prohibit disclosure of payment information.\265\ Those
commenters noted that most confidentiality laws in the extractive
industry sector relate to the confidentiality of geological and other
technical data, and in any event, most resource extraction agreements
contain specific provisions that allow for disclosure when required by
law or stock exchange rules.
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\263\ See letters from OpenOil; OxFam 2; PWYP 5; PWYP-CAM;
Senator Cardin et al. 2; SNS; Reimer; Rep. Waters et al.; The Carter
Center (Apr. 21, 2014) (``Carter'').
\264\ See, e.g., letters from Allianz 2; Cambodians for Resource
Revenue Transparency (Feb. 7, 2012) (``Cambodians''); EG Justice
(Feb. 7, 2012) (``EG Justice 2''); FSNPF; Global Witness 1; Global
Witness 2; Grupo FARO (Feb. 13, 2012) (``Grupo Faro''); Human Rights
Foundation of Monland (Mar. 8, 2011 and July 15, 2011)
(respectively, ``HURFOM 1'' and ``HURFOM 2''); National Civil
Society Coalition on Mineral Resource Governance of Senegal (Feb.
14, 2012) (``National Coalition of Senegal''); OSISA-A; PWYP 1;
Representatives Barney Frank, Jose Serrano, Norman Dicks, Henry
Waxman, Maxine Waters, Donald Payne, Nita Lowey, Betty McCollum,
Barbara Lee, Jesse Jackson, Jr., Alcee Hastings, Gregory Meeks, Rosa
DeLauro, and Marcy Kaptur (Feb. 15, 2012) (``Rep. Frank et al.'');
Sen. Cardin et al. 1; Sen. Cardin et al. 2; Sen. Levin 1; George
Soros (Feb. 21, 2012) (``Soros''); USAID; and letter from WACAM
(Feb. 2, 2012) (``WACAM''). But see letter from API 6 (stating that
the Commission's experience with Rule 1202 of Regulation S-K
indicates that similar exemptions do not incentivize foreign
governments to pass prohibitions on disclosure).
\265\ See, e.g., letters from Calvert 2; ERI 3; Global Witness
1; Global Witness 2; OpenOil; PWYP 1; Publish What You Pay (Dec. 20,
2011) (``PWYP 3''); PWYP 4; and Rep. Frank et al. For a lengthier
discussion of previous comments, see Section II.B.2.b of the 2012
Adopting Release.
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Given these conflicting positions and representations, and
consistent with the EU Directives and ESTMA, we are not proposing an
exemption when the required disclosure is prohibited by host country
law. Instead, we will consider using our existing authority under the
Exchange Act to provide exemptive relief at the request of a resource
extraction issuer, if and when warranted.\266\ We believe that a case-
by-case approach to exemptive relief using our existing authority is
preferable to either adopting a blanket exemption for a foreign law
prohibition (or for any other reason) or providing no exemptions and no
avenue for exemptive relief under this or other circumstances. Among
other things, such an approach would permit us to tailor the exemptive
relief to the particular facts and circumstances presented, such as by
permitting alternative disclosure or by phasing out the exemption over
an appropriate period of time.\267\
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\266\ See Sections 12(h) and 36(a) of the Exchange Act (15
U.S.C. 78l(h) and 78mm(a)).
\267\ For example, if a resource extraction issuer were
operating in a country that enacted a law that prohibited the
detailed public disclosures required under our proposal, the
Commission could potentially issue a limited exemptive order (in
substance and/or duration). The order could be tailored to either
require some form of disclosure that would not conflict with the
host country's law and/or provide the issuer with time to address
the factors resulting in non-compliance.
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This approach would allow us to determine if and when exemptive
relief may be warranted based on the issuer's specific facts and
circumstances.\268\ For example, an issuer claiming that a foreign law
prohibits the required payment disclosure under Section 13(q) would be
able to make its case, based on its own particular circumstances, that
it would suffer substantial commercial or financial harm if relief is
not granted. Issuers seeking an exemption would be required to submit a
written request for exemptive relief to the Commission, describing the
particular payment disclosures it seeks to omit (e.g., signature
bonuses in Country X or production entitlement payments in Country Y)
and the specific facts and circumstances that warrant an exemption,
including the particular costs and burdens it faces if it discloses the
information. The Commission would be able to consider all appropriate
factors in making a determination whether to grant requests, including,
for example, any legal analysis necessary to support the issuer's
request,\269\ whether the disclosure is already publicly available, and
whether (and how frequently) similar information has been disclosed by
other companies, under the same or similar circumstances.\270\ If an
issuer is already making the disclosures under another regulatory
disclosure regime, we anticipate that the applicant would have a heavy
burden to demonstrate that an exemption is necessary from the reporting
required by our proposed rules.\271\
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\268\ See letters from Oxfam 2 and PWYP 4 (each supporting a
case by case exemption).
\269\ For example, we would expect an opinion of counsel in
support of any claim that a foreign law prohibits the disclosure of
the information in question.
\270\ See PWYP 4 (recommending criteria to consider in granting
exemptions).
\271\ The Commission would generally expect to provide public
notice of the exemptive request and an opportunity for public
comment.
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Request for Comment
45. As noted above, we will consider using our existing
exemptive authority, where appropriate, to exempt issuers from the
resource payment disclosure requirements. This could include, for
example, situations where host country laws prohibit the disclosure
called for by the rules. Is a case-by-case exemptive process a
better alternative than providing a rule-based blanket exemption for
specific countries or other circumstances, or providing no
exemptions?
46. What are the advantages and disadvantages, if any, of
relying on our existing exemptive authority under the Exchange Act?
47. Do any foreign laws prohibit the disclosure that would be
required by the proposed rules? Is there any information that has
not been previously provided by commenters to support an assertion
that such prohibitions exist and are not limited in application? If
so, please provide such information and identify the specific law
and the corresponding country.
48. We note that the EU Directives and ESTMA do not provide an
exemption for situations when disclosure is prohibited under host
country law. Has this presented any problems for resource extraction
issuers subject to these reporting regimes? If so, please identify
specific problems that have arisen and explain how companies are
managing those situations.
4. Alternative Reporting
As noted above, several countries have implemented resource
extraction payment disclosure laws since the 2012 Rules.\272\ We also
note that in 2014, the United States became an EITI candidate country.
In light of these developments and with a view towards reducing
compliance costs, we are proposing a provision that would allow issuers
to meet the requirements of the proposed rules, in certain
circumstances, by providing disclosures that comply with a foreign
jurisdiction's rules or that meet the USEITI reporting requirements, if
the Commission has determined that those rules or requirements are
substantially similar to the rules adopted under Section 13(q).\273\
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\272\ See Section I above.
\273\ Proposed Item 2.01(b) of Form SD. See also letters from
Chevron (May 7, 2014) (``Chevron 2'') and Exxon & Royal Dutch Shell
(May 1, 2014) (``Exxon'') (supporting substituted compliance
provisions).
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More specifically, the proposed provision would allow, in certain
circumstances, issuers subject to resource extraction payment
disclosure requirements in a foreign jurisdiction to file the report it
prepared under those foreign requirements in lieu of the report that
would otherwise be required by our disclosure rules. The proposed rules
would permit compliance under this framework only after the Commission
has determined that the foreign disclosure requirements are
substantially similar to the requirements in its rules.\274\ We note
that the Commission has, in other circumstances, recognized that steps
taken to satisfy foreign regulatory
[[Page 80083]]
requirements could, in certain circumstances, also satisfy U.S.
regulatory obligations.\275\
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\274\ In this regard, we could rely on Rule 0-13 [17 CFR 240.0-
13] which permits an application to be filed with the Commission to
request a ``substituted compliance order'' under the Exchange Act.
Pursuant to Rule 0-13, the application must include supporting
documents and will be referred to the Commission's staff for review.
The Commission must publish a notice in the Federal Register that a
complete application has been submitted and allow for public
comment. The Commission may also, in its sole discretion, schedule a
hearing on the matter addressed by the application.
\275\ See, e.g., the Commission's recently adopted rules on
cross-border security-based swaps, which allow for substituted
compliance when market participants are subject to comparable
regulations in other jurisdictions. Release No. 34-75611 (Aug. 5,
2015), 80 FR 48963 (Aug. 14, 2015) (Registration Process for
Security-Based Swap Dealers and Major Security-Based Swap
Participants); Release No. 34-74244 (Feb. 11, 2015), 80 FR 14563
(Mar. 19, 2015) (Regulation SBSR-Reporting and Dissemination of
Security-Based Swap Information); and Release No. 34-72472 (June 25,
2014), 79 FR 47277 (Aug. 12, 2014) (Application of ``Security-Based
Swap Dealer'' and ``Major Security-Based Swap Participant''
Definitions to Cross-Border Security-Based Swap Activities).
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The alternative reporting provision would also be extended, to the
extent appropriate,\276\ to reports submitted in full compliance with
the USEITI reporting standards, provided that the Commission has
determined that the disclosures required thereunder are substantially
similar to the final rules under Section 13(q).
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\276\ The USEITI only requires disclosure of payments made to
the U.S. federal government. As such, any future determination that
the USEITI reporting standards are ``substantially similar'' to the
requirements of the proposed rules could only apply to the
disclosures required by the proposed rules concerning payments made
by resource extraction issuers to the Federal Government. In these
circumstances, an extraction issuer that made payments to a foreign
government would still need to report those payments in accordance
with Form SD and could not rely on its USEITI reports to satisfy
this component of its Rule 13q-1 reporting obligation.
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This framework for alternative reporting would allow a resource
extraction issuer to avoid the costs of having to prepare a separate
report meeting the requirements of our proposed disclosure rules when
it already files a substantially similar report in another jurisdiction
or under USEITI. Adoption of such a provision would also be consistent
with the approach taken in the EU Directives and ESTMA.\277\ In
addition, we believe that adoption of such a provision would promote
international transparency efforts by providing an incentive to a
foreign country that is considering adoption of resource extraction
payment disclosure laws to provide a level of disclosure that is
consistent with our rules.
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\277\ As we noted in Section I above, Canada's Minister of
Natural Resources has already determined that the EU Directives are
equivalent to Canada's requirements. Extractive Sector Transparency
Measures Act--Substitution Determination, available at http://www.nrcan.gc.ca/acts-regulations/17754 (last visited Dec. 8, 2015).
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We are proposing to require resource extraction issuers to file the
substantially similar report as an exhibit to Form SD. A resource
extraction issuer would also be required to state in the body of its
Form SD filing that it is relying on our accommodation and identify the
alternative reporting regime for which the report was prepared (e.g., a
foreign jurisdiction or the USEITI).
We anticipate that we would make determinations about the
similarity of a foreign jurisdiction's disclosure requirements either
unilaterally or pursuant to an application submitted by an issuer or a
jurisdiction. We anticipate following the same process in determining
whether USEITI disclosures are substantially similar. We would then
publish the determinations in the form of a Commission order. We would
consider, among others, the following criteria in making a
determination whether USEITI or a foreign jurisdiction's reporting
requirements are substantially similar to ours: (1) The types of
activities that trigger disclosure; (2) the types of payments that are
required to be disclosed; (3) whether project-level disclosure is
required and, if so, the definition of ``project;'' (4) whether the
disclosure must be publicly filed and whether it includes the identity
of the issuer; and (5) whether the disclosure must be provided using an
interactive data format that includes electronic tags. When considering
whether to allow substituted reporting based on a foreign
jurisdiction's reporting requirements, we would also consider whether
disclosure of payments to subnational governments is required and
whether there are any exemptions allowed and, if so, whether there are
any conditions that would limit the grant or scope of the exemptions.
Request for Comment
49. Should we include a provision in the rules that would allow
for issuers subject to reporting requirements in certain foreign
jurisdictions or under the USEITI to submit those reports in
satisfaction of our requirements? Why or why not? If so, what
criteria should we apply when making a determination that the
alternative disclosure requirements are substantially similar to the
disclosure requirements under Rule 13q-1? Are there additional
criteria, other than those identified above, that we should apply in
making such a determination? Are there criteria identified above
that we should not apply? Should we align our criteria with criteria
used in foreign jurisdictions, such as the EU Directives?
50. We propose to base our determination on a finding that the
foreign jurisdiction's or the USEITI's requirements are
substantially similar to our own. Is this the standard we should
use? Should we consider other standards, for example, a
determination that a foreign jurisdiction's or the USEITI's
requirements are ``equivalent'' or ``comparable?''
51. Given the specificity of the disclosures required, should we
consider a stricter or more flexible standard? Are there other
standards for determining when reliance on foreign or USEITI
requirements is appropriate that we should consider? If so, please
describe the standard and why it should be used.
52. In making the determination that a foreign jurisdiction's or
the EITI's disclosure requirements are substantially similar to our
own, should we make the determination unilaterally on our own
initiative, require an issuer to submit an application prior to
making the determinations, allow jurisdictions to submit an
application, or allow all of these methods? If we should require an
application, what supporting evidence should we require? For
example, should we require a legal opinion that the disclosure
requirements are substantially similar?
53. Under Exchange Act Rule 0-13, we could consider requests for
substituted compliance upon application by an applicant or the
jurisdiction itself and after notice and an opportunity for public
comment.\278\ Does Rule 0-13 provide an appropriate structure for
the Commission to make decisions regarding the similarity of
resource extraction payment disclosure requirements in foreign
jurisdictions or under the USEITI's reporting regime for purposes of
Rule 13q-1?
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\278\ See note 274 above.
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54. Is there another process for the Commission to use to
consider substituted compliance requests other than the Rule 0-13
process? For example, should the Commission use the process set
forth in Rule 0-12? Should the Commission permit someone other than
a resource extraction issuer or a foreign or domestic authority to
submit an application for substituted compliance?
55. As noted above, in making a determination about the
similarity of a foreign jurisdiction's disclosure requirement, the
Commission would consider, among other things, whether the
disclosure must be provided using an interactive data format that
includes electronic tags. If a foreign jurisdiction requires an
interactive data format other than XBRL, but otherwise calls for
disclosure substantially similar to our own, should we nonetheless
require resource extraction issuers to file these disclosures in
XBRL? Would having the payment data tagged using different
interactive formats adversely affect the ability of users to compile
and analyze the data? In these circumstances, are there other
alternatives we should consider?
56. Given the progress in the development of resource extraction
payment disclosure rules in certain jurisdictions, should we
consider making a determination regarding the similarity of certain
foreign reporting requirements when the final rule is adopted?
Currently, payment disclosure rules are in place in the United
Kingdom, Norway, and Canada. Should we determine whether rules in
all of these jurisdictions are substantially similar for purposes of
the final rule? Are there other jurisdictions that also have payment
disclosure rules in place that we should consider for purposes of
compliance with Rule 13q-1?
[[Page 80084]]
57. The USEITI reporting framework only requires disclosure of
payments made to the U.S. federal government while the proposed
rules would require disclosure of payments to foreign governments
and the Federal Government. Thus, as proposed, if the Commission
were to find that the USEITI reporting standards are ``substantially
similar'' to the requirements of the proposed rules, the Commission
would permit issuers to file reports submitted in full compliance
with the USEITI in lieu of the disclosure required by the proposed
rules concerning payments made by resource extraction issuers to the
Federal Government. In these circumstances, any payments made to
foreign governments would still need to be reported in accordance
with Form SD. In light of the reporting differences between the
USEITI and our proposed rules, however, should the Commission
preclude the use of USEITI reports under the alternative reporting
provision when a resource extraction issuer would also have to
disclose payments made to foreign governments pursuant to the
proposed rules?
5. Exhibits and Interactive Data Format Requirements
We are proposing requirements for the presentation of the mandated
payment information similar to those set forth in the 2012 Rules. The
proposed rules would require a resource extraction issuer to file the
required disclosure on EDGAR in an XBRL exhibit to Form SD. Providing
the required disclosure elements in a machine readable (electronically-
tagged) format would enable users easily to extract, aggregate, and
analyze the information in a manner that is most useful to them. For
example, it would allow the information received from the issuers to be
converted by EDGAR and other commonly used software and services into
an easily-readable tabular format.\279\
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\279\ Another possible alternative for providing the information
in interactive data format would be Inline XBRL. Commission rules
and the EDGAR system do not currently allow for the use of Inline
XBRL. To the extent that a determination is made in the future to
accept Inline XBRL submissions, we expect to revisit the format in
which this disclosure requirement is provided.
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Section 13(q) requires the submission of certain information in
interactive data format.\280\ Under the proposed rules, consistent with
the 2012 Rules and the statutory language, a resource extraction issuer
would be required to submit the payment information in XBRL using
electronic tags--a taxonomy of defined reporting elements--that
identify, for any payment required to be disclosed:
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\280\ 15 U.S.C. 78m(q)(2)(C) and 15 U.S.C. 78m(q)(2)(D)(ii). The
Commission has defined an ``interactive data file'' to be the
interactive data submitted in a machine-readable format. See 17 CFR
232.11; Release No. 33-9002 (Jan. 14, 2009), 74 FR 6776, 6778 n.50
(Feb. 10, 2009).
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The total amounts of the payments, by category; \281\
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\281\ For example, categories of payments could be bonuses,
taxes, or fees.
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The currency used to make the payments;
The financial period in which the payments were made;
The business segment of the resource extraction issuer
that made the payments;
The government that received the payments, and the country
in which the government is located; and
the project of the resource extraction issuer to which the
payments relate.\282\
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\282\ See proposed Item 2.01(a) of Form SD.
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In addition to the electronic tags specifically required by the
statute, a resource extraction issuer would also be required to provide
and tag the type and total amount of payments made for each project and
the type and total amount of payments for all projects made to each
government. These additional tags relate to information that is
specifically required to be included in the resource extraction
issuer's annual report by Section 13(q).\283\ Unlike the 2012 Rules,
however, which included those additional tags, the proposed rules would
also require resource extraction issuers to tag the particular resource
that is the subject of commercial development, and the subnational
geographic location of the project.\284\ We believe that these
additional tags would further enhance the usefulness of the data with
an insignificant corresponding increase in compliance costs.\285\
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\283\ See Section 13(q)(2)(A)(i)-(ii).
\284\ API has similarly suggested requiring electronic tags for
the type of resource and governmental payee. See letter from API 6.
\285\ See proposed Item 2.01(a)(9)-(10) of Form SD.
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For purposes of identifying the subnational geographic location of
the project, an instruction to the disclosure item would specify that
issuers must provide information regarding the location of the project
that is sufficiently detailed to permit a reasonable user of the
information to identify the project's specific, subnational
location.\286\ Depending on the facts and circumstances, this could
include the name of the subnational governmental jurisdiction(s) (e.g.,
state, province, county, district, municipality, territory, etc.) or
the commonly recognized subnational geographic or geologic location
(e.g., oil field, basin, canyon, delta, desert, mountain, etc.) where
the project is located, or both. We anticipate that more than one
descriptive term would likely be necessary when there are multiple
projects in close proximity to each other or when a project does not
reasonably fit within a commonly recognized, subnational geographic
location. In considering the appropriate level of detail, issuers may
need to consider how the relevant contract identifies the location of
the project.\287\
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\286\ See proposed Instruction 3 to Item 2.01 of Form SD.
\287\ See id.
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In proposing to require the use of XBRL as the interactive data
format, we note that a number of the commenters who addressed the issue
prior to the 2012 Rules supported the use of XBRL.\288\ While some
commenters suggested allowing the flexibility to use an interactive
data format of their preference,\289\ that approach could reduce the
comparability of the information and make it more difficult for
interested parties to track payments made to a particular government or
project.
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\288\ See letters from API 1; Anadarko Petroleum Corporation
(Mar. 2, 2011) (``Anadarko''); AngloGold; BP 1; California Public
Employees Retirement System (Feb. 28, 2011) (``CalPERS'');
ExxonMobil 1; PWYP 1; and RDS 2. See also 2012 Adopting Release,
n.410 and accompanying text.
\289\ See letters from Barrick Gold and NMA 2. See also 2012
Adopting Release, n.413 and accompanying text.
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Consistent with the statute, the proposed rules would require a
resource extraction issuer to include an electronic tag that identifies
the currency used to make the payments. The statute also requires a
resource extraction issuer to present the type and total amount of
payments made for each project and to each government, but does not
specify how the issuer should report the total amounts. Although some
commenters suggested requiring the reporting of payments only in the
currency in which they were made,\290\ we believe that the statutory
requirement to provide a tag identifying the currency used to make the
payment coupled with the requirement to disclose the total amount of
payments by payment type for each project and to each government
requires issuers to perform currency conversion when payments are made
in multiple currencies.
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\290\ See letters from NMA 2 and PWYP 1. See also 2012 Adopting
Release, n.421 and accompanying text.
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We are proposing an instruction to Form SD clarifying that issuers
would have to report the amount of payments made for each payment type,
and the total amount of payments made for each project and to each
government in U.S. dollars or in the issuer's reporting currency if not
U.S. dollars.\291\ We
[[Page 80085]]
understand issuers' concerns regarding the compliance costs relating to
making payments in multiple currencies and being required to report the
information in another currency.\292\ A resource extraction issuer
would be able to choose to calculate the currency conversion between
the currency in which the payment was made and U.S. dollars or the
issuer's reporting currency, as applicable, in one of three ways: (1)
By translating the expenses at the exchange rate existing at the time
the payment is made; (2) by using a weighted average of the exchange
rates during the period; or (3) based on the exchange rate as of the
issuer's fiscal year end.\293\ A resource extraction issuer would have
to disclose the method used to calculate the currency conversion.\294\
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\291\ See proposed Instruction 2 to Item 2.01 of Form SD.
Currently, foreign private issuers may present their financial
statements in a currency other than U.S. dollars for purposes of
Securities Act registration and Exchange Act registration and
reporting. See Rule 3-20 of Regulation S-X [17 CFR 210.3-20].
\292\ See, e.g., letters from API 1; BP 1; ExxonMobil 1; NMA 2;
and RDS 2. We note that the EITI recommends that oil and natural gas
participants report in U.S. dollars, as the quoted market price of
these resources 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 Handbook, at 30.
\293\ See proposed Instruction 2 to Item 2.01 of Form SD.
\294\ See id.
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Consistent with Section 13(q) and the 2012 Rules, the proposed
rules would 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 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.\295\ In contrast, Section 13(q) requires us to issue rules for
disclosure of payments by resource extraction issuers; it does not
contemplate that an administrator would audit and reconcile the
information, or produce a report as a result of the audit and
reconciliation. Moreover, while Section 13(q) refers to ``payments,''
it does not require the information to be included in the financial
statements.\296\ In addition, we recognize the concerns raised by some
commenters that an auditing requirement for the payment information
would significantly increase implementation and ongoing reporting
costs.\297\
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\295\ See EITI Standard, at 30-31.
\296\ See 2012 Adopting Release, n.405 and accompanying text.
\297\ See, e.g., letters from Anadarko, AngloGold, API 1, BP 1,
Chevron 1, Ernst & Young (Jan. 31, 2011), ExxonMobil 1, NYSBA
Committee, Petrobras, and PWC.
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Consistent with the statute and the 2012 Rules, the proposed rules
would 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 commenters,\298\ we are
proposing to define ``business segment'' as a business segment
consistent with the reportable segments used by the resource extraction
issuer for purposes of financial reporting.\299\ Defining ``business
segment'' in this way would enable issuers to report the information
according to how they currently report their business operations, which
should help to reduce compliance costs.
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\298\ See 2012 Adopting Release, n.426 and accompanying text.
\299\ See proposed Item 2.01(c)(1) of Form SD. The term
``reportable segment'' is defined in FASB ASC Topic 280, Segment
Reporting, and IFRS 8, Operating Segments.
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We note that some of the electronic tags, such as those pertaining
to category, currency, country, and financial period would have fixed
definitions and would 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,
would 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 could omit certain tags that may be inapplicable (e.g.,
project tag, business segment tag) for those payment types as long as
they provide all other electronic tags, including the tag identifying
the recipient government.\300\
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\300\ See 2012 Adopting Release, n.432 and accompanying text.
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Finally, we note that Section 13(q)(3) directs the Commission, to
the extent practicable, to provide a compilation of the disclosure made
by resource extraction issuers. The proposed rules would require that
the disclosures only be made available on EDGAR in an XBRL exhibit. The
Commission does not anticipate making an additional or different
compilation of information available to the public. Information
provided on Form SD using the XBRL standard can be electronically
searched and extracted and therefore, in our view, would function as an
effective and efficient compilation for public use by allowing data
users to create their own compilations and analyses. Moreover, the
functionality provided by EDGAR would allow a user to create an up-to-
date compilation in real time (rather than looking to a potentially
dated, periodically released Commission compilation) and to create a
compilation that is tailored to the specific parameters that the user
may direct EDGAR to compile.\301\
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\301\ Our review of the legislative history leading up to the
adoption of Section 13(q) persuades us that the public compilation
requirement was not intended to be a substitute for the public
disclosure of an issuer's annual reports. Rather, the public
compilation requirement, added to an earlier version of the
legislation that became Section 13(q), was intended for the
convenience of the users of that data--many of whom were not seeking
the information for purposes of investment activity and thus would
potentially be unfamiliar with locating information in the extensive
annual reports that issuers file. In the earlier versions of the
draft legislation, the resource extraction payment disclosures were
required to be made in the annual report that each issuer was
already required to file under the securities laws. See, e.g.,
Extractive Industries Transparency Disclosure Bill (H.R. 6066) (May
2008) (``requir[ing] that each issuer required [to] file an annual
report with the Commission shall disclose in such report'' the
resource extraction payments that the issuer makes) (emphasis
added). For the convenience of non-investor users of the data, the
provision included a separate section entitled ``Public Availability
of Information'' that provided in pertinent part: ``The Securities
and Exchange Commission shall, by rule or regulation, provide that
the information filed by all issuers . . . be compiled so that it is
accessible by the public directly, and in a compiled format, from
the Web site of the Commission without separately accessing . . .
the annual reports of each issuer filing such information.'' Id.
(emphasis added). As the proposed legislative language was later
being incorporated into the Act, the Commission's staff gave
technical advice that led to the modification of the legislative
text to provide the Commission with additional flexibility to permit
the disclosures in an annual report other than ``the annual report''
that issuers already file so as to avoid unnecessarily burdening
issuers. See 156 CONG. REC. 3815 (May 17, 2010 (Statement of Senator
Cardin) (``We have been working with a lot of groups on perfecting
this amendment, and we have made some changes that will give the SEC
the utmost flexibility in defining how these reports will be made so
that we not get the transparency we need without burdening the
companies.''). Our decision to propose a Form SD rather than to
require the disclosures in an issuer's annual report, when coupled
with the functionality that the EDGAR system provides, in our view
sufficiently addresses the Congressional concern that originally led
to the separate requirement of a publicly available compilation.
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Request for Comment
58. Should we require a resource extraction issuer to present
some or all of the required payment information in the body of the
annual report on Form SD instead of, or in addition to, presenting
the information in the exhibits? If we should require disclosure of
some or all the payment information in the body of the annual
report, please explain what information should be required and why.
For example, should we require a
[[Page 80086]]
resource extraction issuer to provide a summary of the payment
information in the body of the annual report? If so, what items of
information should be disclosed in the summary?
59. How should the total amount of payments be reported when
payments are made in multiple currencies? Do the three proposed
methods for calculating the currency conversion described above
provide issuers with sufficient options to address any possible
concerns about compliance costs, the comparability of the disclosure
among issuers, or other factors? Why or why not?
60. Should we require the resource extraction payment disclosure
to be electronically formatted in XBRL and provided in a new
exhibit, as proposed? Is XBRL the most suitable interactive data
standard for purposes of this rule?
61. Section 13(q) and our proposed rules require an issuer to
include an electronic tag that identifies the issuer's business
segment that made the payments. Should we define ``business
segment'' differently than we have proposed? If so, what definition
should we use?
62. As proposed, should we require resource extraction issuers
to tag the particular resource that is the subject of commercial
development and the subnational geographic location of the project?
Why or why not? Would these additional tags further enhance the
usefulness of the data without significantly increasing compliance
costs?
63. As we have noted, we believe that it is important that the
project-level disclosures enable local communities to identify the
revenue streams associated with particular extractive projects. When
combined with the other tagged information, would our proposed
approach to describing the geographic location of the project
provide sufficient detail to users of the disclosure? Would users be
able to identify the location of the project and distinguish that
project from other projects in the same area? Would allowing
resource extraction issuers flexibility in describing the location
of their projects reduce comparability and the usefulness of the
disclosure? Should we prescribe a different method for describing
the location of a project? If so, what should that method be?
64. Proposed Instruction 3 to Item 2.01 states that the
``geographic location of the project'' must be sufficiently detailed
to permit a ``reasonable user of the information'' to identify
specific, subnational geographic locations. Should we provide more
guidance as to what is a sufficient level of detail or how such
instruction should be applied?
65. Is there additional or other information that should be
required to be electronically tagged to make the disclosure more
useful to local communities and other users of the information? If
so, what additional information should be required and why?
66. Section 13(q)(3) directs the Commission, to the extent
practicable, to provide a compilation of the disclosure made by
resource extraction issuers. We believe that we satisfy the
statutory requirement by making each resource extraction issuer's
disclosures available on EDGAR in XBRL format. Is a different
compilation necessary? If so, what information should this
compilation include and how often should it be provided? Should a
compilation be provided on a calendar year basis, or would some
other time period be more appropriate?
6. Treatment for Purposes of Securities Act and Exchange Act
Consistent with the 2012 Rules, the proposed rules would require
resource extraction issuers to file the payment information on Form SD.
Commenters on the 2010 Proposing Release had divergent views as to
whether the required information should be furnished or filed,\302\ and
Section 13(q) does not state how the information should be submitted.
In reaching the conclusion that the information should be ``filed''
instead of ``furnished,'' the Commission noted that the statute defines
``resource extraction issuer'' in part to mean an issuer that is
required to file an annual report with the Commission,\303\ which, as
commenters have stated, suggests that the annual report that includes
the required payment information should be filed.\304\ We believe the
same logic still applies.
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\302\ Compare letters from API 1; AngloGold; Barrick Gold; BP 1;
Cleary; ExxonMobil 1; NMA 2; NYSBA Committee; PetroChina; PWC; and
RDS 2 (supporting a requirement to furnish the disclosure) with
letters from Bon Secours Health System (Mar. 1, 2011) (``Bon
Secours''); Calvert 1; Earthworks; Extractive Industries Working
Group (Mar. 2, 2011) (``EIWG''); ERI 1; EarthRights International
(Sept. 20, 2011) (``ERI 2''); Global Financial Integrity (Mar. 1,
2011) (``Global Financial 2''); Global Witness 1; Harrington
Investments, Inc. (Jan. 19, 2011) (``HII''); HURFOM 1; HURFOM 2;
Newground Social Investment (Mar. 1, 2011) (``Newground''); ONE;
Oxfam 1; PGGM Investments (Mar. 1, 2011) (``PGGM''); PWYP 1; RWI 1;
Peter Sanborn (Mar. 12, 2011) (``Sanborn''); Sen. Cardin et al. 1;
Sen. Cardin et al. 2; Sen. Levin 1; Soros; TIAA-CREF (March 2, 2011)
(``TIAA''); USAID; United Steelworkers (Mar. 29, 2011) (``USW'');
and WRI (supporting a requirement to file the disclosure).
\303\ 15 U.S.C. 78m(q)(1)(D)(i).
\304\ See letters from Global Witness 1; PWYP 1; and Sen. Cardin
et al. 1.
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Additionally, many commenters on the 2010 Proposing Release
believed that investors would benefit from the payment information
being ``filed'' and subject to Exchange Act Section 18 liability.\305\
Some commenters asserted that allowing the information to be furnished
would diminish the importance of the information.\306\ Some commenters
believed that requiring the information to be filed would enhance the
quality of the disclosure.\307\ In addition, some commenters argued
that the information required by Section 13(q) differs from the
information that the Commission typically permits issuers to furnish
and that the information is qualitatively similar to disclosures that
are required to be filed under Exchange Act Section 13.\308\
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\305\ See letters from Bon Secours; Calvert 1; CRS; Earthworks;
EIWG; ERI 1; ERI 2; Global Financial 2; Global Witness 1; Greenpeace
(Mar. 8, 2012) (``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; TIAA; USAID; USW; and
WRI.
\306\ See letters from Calvert 1 and Global Witness 1.
\307\ See letters from HURFOM 1; Global Witness 1; and PWYP 1.
\308\ See letters from ERI 1; HII; Oxfam 1; PGGM; PWYP 1; Sen.
Cardin et al. 1; and Soros.
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Some commenters argued that the disclosure should be furnished
because the information is not material to investors.\309\ Others,
including some investors, stated that the information is material.\310\
Given this 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. After considering the comments and the
statutory language, we continue to believe that the information should
be required to be filed. 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 such
person can establish that he or she acted in good faith and had no
knowledge that the statement was false or misleading.\311\ As noted
[[Page 80087]]
above, although we are proposing that the information would be filed,
because the disclosure would be in a new form, rather than in issuers'
Exchange Act annual reports, the filed disclosure would not be subject
to the officer certifications required by Rules 13a-14 and 15d-14 under
the Exchange Act.
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\309\ See letters from API 1; ExxonMobil 1; and RDS 2. See also
letter from AngloGold.
\310\ See, e.g., letters from Calvert 1; ERI 1; Soros; Global
Financial Integrity (Jan. 28, 2011) (``Global Financial 1''); Global
Witness 1; HII; Oxfam 1; Sanborn; PGGM; PWYP 1; Sen. Cardin et al.
1; and TIAA.
\311\ 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 proposed 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.
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Request for Comment
67. Should we, as proposed, require the resource extraction
payment disclosure to be filed, rather than furnished? If not, why
not? Are there compelling reasons why the disclosures should not be
subject to Section 18 liability?
68. Should we require that certain officers, such as the
resource extraction issuer's principal executive officer, principal
financial officer, or principal accounting officer, certify the Form
SD filing's compliance with the requirements of Section 13(q) of the
Exchange Act or that the filing fairly presents the information
required to be disclosed under Rule 13q-1? Are there any other
certifications we should require officers of resource extraction
issuers to make?
H. Effective Date
Section 13(q) provides that, with respect to each resource
extraction issuer, the final rules issued under that section shall take
effect on the date on which the resource extraction issuer is required
to submit an annual report relating to the issuer's fiscal year that
ends not earlier than one year after the date on which the Commission
issues the final rules under Section 13(q).\312\ Similar to the
approach in the 2012 Rules, we are proposing that resource extraction
issuers would be required to comply with Rule 13q-1 and Form SD for
fiscal years ending no earlier than one year after the effective date
of the adopted rules.\313\ Also, as with the 2012 Rules, we intend to
select a specific compliance date that corresponds to the end of the
nearest calendar quarter, such as March 31, June 30, September 30, or
December 31.\314\ For example, if June 17, 2017 was one year after the
effective date of the rules, a resource extraction issuer with a fiscal
year end of June 30, 2017 (our selected compliance date) or later would
be required to file its first resource extraction payment report no
later than 150 days after its fiscal year end.
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\312\ 15 U.S.C. 78m(q)(2)(F).
\313\ Adopted rules typically go into effect 60 days after they
are published in the Federal Register.
\314\ See 2012 Adopting Release at 2 [77 FR 56365].
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Upon adoption, if any provision of these proposed 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 application.
Request for Comment
69. Should we provide a compliance date linked to the end of the
nearest commonly used quarterly period following the effective date,
as proposed? Should we adopt a shorter or longer transition period?
70. Should our rules provide for a longer transition period for
certain categories of resource extraction issuers, such as smaller
reporting companies or emerging growth companies? Should the rules
provide for a longer transition period for smaller reporting
companies or emerging growth companies to allow for data to be
collected on the impact the EU Directives or ESTMA would have on
companies of similar size? Why or why not?
I. General Request for Comment
We request and encourage any interested person to submit comments
regarding:
The proposed amendments that are the subject of this
release;
additional or different changes; or
other matters that may have an effect on the proposals
contained in this release, particularly any developments since the
rules adopted in 2012 were vacated.
We request comment on whether we have properly identified the
objectives of Section 13(q) and the governmental interests that the
statute and our rules are designed to advance. We also are interested
in comments that provide evidence of whether public disclosure
(particularly company specific, project-level, public disclosure)
supports the commitment of the Federal Government to international
transparency promotion efforts, helps to combat corruption, or promotes
governmental accountability.\315\
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\315\ Some commenters have also expressed the view that this
information is important to investors. See, e.g., note 310 above and
accompanying text.
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We request comment from the point of view of companies, investors,
other market participants, and civil society actors. We also request
comment from the U.S. Department of State, the U.S. Agency for
International Development, the U.S. Department of the Interior and any
other relevant department or agency on the implications of this
rulemaking for international transparency promotion efforts. With
regard to any comments, we note that such comments are of great
assistance to our rulemaking initiative if accompanied by supporting
data and analysis of the issues addressed in those comments.
III. Economic Analysis
A. Introduction and Baseline
As discussed in detail above, we are proposing Rule 13q-1 and an
amendment to Form SD to implement Section 13(q), which was added to the
Exchange Act by Section 1504 of the Act. Section 13(q) directs the
Commission to issue rules that require a resource extraction issuer to
disclose in an annual report filed with the Commission certain
information relating to payments made by the issuer (including a
subsidiary of the issuer or an entity under the issuer's control) to a
foreign government or the U.S. Federal Government for the purpose of
the commercial development of oil, natural gas, or minerals. The
proposed rule and form amendments implement Section 13(q).
As discussed above, Congress intended that the rules issued
pursuant to Section 13(q) would help advance the important U.S. foreign
policy objective of combatting global corruption and, in so doing, to
potentially improve accountability and governance in resource-rich
countries around the world.\316\ The statute seeks to achieve this
objective by mandating a new disclosure provision under the Exchange
Act that requires resource extraction issuers to identify and report
payments they make to governments relating to the commercial
development of oil, natural gas, or minerals. While these objectives
and benefits differ from the investor protection benefits that our
rules typically strive to achieve, investors and other market
participants, as well as civil society in countries that are resource-
rich, may benefit from any increased economic and political stability
and improved investment climate that such transparency promotes.\317\
In addition, some commenters stated that the information disclosed
pursuant to Section 13(q) would benefit investors by, among other
things, helping them model project cash
[[Page 80088]]
flows and assess political risk, acquisition costs, and management
effectiveness.\318\
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\316\ See Section I.E.
\317\ See also 156 CONG. REC. S5873 (2010) (Statement from
Senator Cardin) (``Transparency helps create more stable
governments, which in turn allows U.S. companies to operate more
freely--and on a level playing field--in markets that are otherwise
too risky or unstable.''); and 156 CONG. REC. S3816 (May 17, 2010)
(Statement of Senator Lugar) (``Transparency empowers citizens,
investors, regulators, and other watchdogs and is a necessary
ingredient of good governance for countries and companies alike. . .
. Transparency also will benefit Americans at home. Improved
governance of extractive industries will improve investment climates
for our companies abroad, it will increase the reliability of
commodity supplies upon which businesses and people in the United
States rely, and it will promote greater energy security.'')
\318\ See, e.g., letters from Calvert 1; CalPERS; and Soros.
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We are sensitive to the costs and benefits of the proposed 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 directs us, when engaging in
rulemaking that requires us to consider or determine whether an action
is necessary or appropriate in the public interest, to consider, in
addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. We have
considered the costs and benefits that would result from the proposed
rule and form amendments, as well as the potential effects on
efficiency, competition, and capital formation. Many of the potential
economic effects of the proposed rules would stem from the statutory
mandate, while others would be a result of the discretion we are
proposing to exercise in implementing the Congressional mandate. The
discussion below addresses the costs and benefits that might result
from both the statute and our proposed discretionary choices, and the
comments we received about these matters.\319\ In addition, as
discussed elsewhere in this release, we recognize that the proposed
rule could impose a burden on competition, but we believe that any such
burden that might result would be necessary in furtherance of the
purposes of Exchange Act Section 13(q).
---------------------------------------------------------------------------
\319\ 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.
---------------------------------------------------------------------------
As part of our analysis, we have quantified the potential economic
effects wherever possible. Given both the nature of the statute's
intended benefits and the lack of data regarding the benefits and the
costs, in some cases we have been unable to provide a quantified
estimate. Nevertheless, as described more fully below, we provide both
a qualitative assessment of the potential effects and a quantified
estimate of the potential aggregate initial and aggregate ongoing
compliance costs. We reach our estimates by carefully considering
comments we previously received on potential costs and taking into
account additional data and information, including recent global
developments in connection with resource extraction payment
transparency. We rely particularly on those comment letters that
provided quantified estimates and were transparent about their
methodologies. As discussed in more detail below, after considering the
comment letters, we determined that it was appropriate to modify and/or
expand upon some of the submitted estimates and methodologies to
reflect data and information submitted by other commenters, as well as
our own judgment and experience.
The baseline the Commission uses to analyze the potential effects
of the proposed rules is the current set of regulations and market
practices.\320\ To the extent not already encompassed by existing
regulations and current market practices, the proposed rules likely
would have a substantial impact on the disclosure practices of, and
costs faced by, resource extraction issuers. The magnitude of the
potential effects on costs of the proposed disclosure requirements
would depend on the number of affected issuers and individual issuers'
costs of compliance. We expect that the proposed rules would affect
both U.S. issuers and foreign issuers that meet the definition of
``resource extraction issuer'' in substantially the same way, except
for those issuers already subject to similar rules adopted in the EEA
member countries or Canada as discussed below in Section III.C.1. The
discussion below describes the Commission's understanding of the
markets that are affected by the proposed rules. We estimate the number
of affected issuers in this section and quantify their costs in Section
III.B.2 below.
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\320\ See Section I.
---------------------------------------------------------------------------
To estimate the number of potentially affected issuers, we use data
from Exchange Act annual reports for 2014, the latest full calendar
year. We consider all Forms 10-K, 20-F, and 40-F filed in 2014 by
issuers with oil, natural gas, and mining Standard Industrial
Classification (``SIC'') codes \321\ and, thus, are most likely to be
resource extraction issuers. We also considered filings by issuers that
do not have the above mentioned oil, natural gas, and mining SIC codes
and added them to the list of potentially affected issuers if we
determined that they might be affected by the proposed rules.\322\ In
addition, we have attempted to remove issuers that use oil, natural
gas, and mining SIC codes but appear to be more accurately classified
under other SIC codes based on the disclosed nature of their business.
Finally, we have excluded royalty trusts from our analysis, because we
believe it is uncommon for such companies to make the types of payments
that would be covered by the proposed rules. From these filings, we
estimate that the number of potentially affected issuers is 877. We
note that this number does not reflect the number of issuers that
actually made resource extraction payments to governments in 2014, but
represents the estimated number of issuers that might make such
payments.
---------------------------------------------------------------------------
\321\ Specifically, the oil, natural gas, and mining SIC codes
considered are 1000, 1011, 1021, 1031, 1040, 1041, 1044, 1061, 1081,
1090, 1094, 1099, 1220, 1221, 1222, 1231, 1311, 1321, 1381, 1382,
1389, 1400, 2911, 3330, 3331, 3334, and 3339.
\322\ These are issuers whose primary business is not
necessarily resource extraction but which have some resource
extraction operations, such as ownership of mines.
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In the following economic analysis, we discuss the potential
benefits and costs and likely effects on efficiency, competition, and
capital formation that might result from both the new reporting
requirement mandated by Congress and from the specific implementation
choices that we have made in formulating these proposed rules.\323\ We
analyze these potential economic effects in Sections III.B and III.C
and provide qualitative and, wherever possible, quantitative
discussions of the potential costs and benefits that might result from
the payment reporting requirement and specific implementation choices,
respectively.
---------------------------------------------------------------------------
\323\ Our consideration of potential benefits and costs and
likely effects on efficiency, competition, and capital formation
also is reflected in Section II.
---------------------------------------------------------------------------
B. Potential Effects Resulting From the Payment Reporting Requirement
1. Benefits
As noted above, we understand that Section 13(q) and the rules
required thereunder are intended to advance the important U.S. foreign
policy objective of combatting global corruption and, in so doing, to
potentially improve accountability and governance in resource-rich
countries around the world.\324\ The statute seeks to realize these
goals by improving transparency about payments extractive industries
make to national and subnational governments, including local
governmental entities.\325\ While these statutory goals and intended
benefits are of global significance, the potential positive economic
effects that may result cannot be readily quantified with any
precision. The current empirical evidence on the direct causal effect
of increased transparency in the resource extraction sector on societal
outcomes is inconclusive,\326\ and several academic
[[Page 80089]]
papers noted an inherent difficulty in empirically validating a causal
link between transparency interventions and governance
improvements.\327\ Further, we note that no commenter provided us with
data that would allow us to quantify the potential benefits nor did any
commenter suggest a source of data or a methodology that we could
readily look to in quantifying the rule's potential benefits.
---------------------------------------------------------------------------
\324\ See Section I.E above.
\325\ See id.
\326\ For positive findings, see Caitlin C. Corrigan, ``Breaking
the resource curse: Transparency in the natural resource sector and
the extractive industries transparency initiative'', Resources
Policy, 40 (2014), 17-30 (finding that the negative effect of
resource abundance on GDP per capita, the capacity of the government
to formulate and implement sound policies and the level of rule of
law is mitigated in EITI countries but noting that the EITI has
little effect on level of democracy, political stability and
corruption) and Liz David-Barrett and Ken Okamura, ``The
Transparency Paradox: Why Do Corrupt Countries Join EITI?'', Working
Paper No. 38, European Research Centre for Anti-Corruption and
State-Building (Nov. 2013) (finding that EITI compliant countries
gain access to increased aid the further they progress through the
EITI implementation process and that EITI achieves results in terms
of reducing corruption) available at https://eiti.org/document/transparency-paradox-why-do-corrupt-countries-join-eiti. For
negative empirical evidence, see [Ouml]lcer, Dilan (2009):
Extracting the Maximum from the EITI (Development Centre Working
Papers No. 276): Organisation for Economic Cooperation and
Development (finding that the EITI has not been able to
significantly lower corruption levels). However, all these papers
discuss the earlier version of the EITI which did not require
project-level disclosure and rely on data generated prior to the
implementation of the 2013 EITI Standard.
\327\ See Andr[eacute]s Mej[iacute]a Acosta, ``The Impact and
Effectiveness of Accountability and Transparency Initiatives: The
Governance of Natural Resources'', Development Policy Review, 31-S1
(2013), s89-s105; and Alexandra Gillies and Antoine Heuty, ``Does
Transparency Work? The Challenges of Measurement and Effectiveness
in Resource-Rich Countries'', Yale Journal of International Affairs,
Spring/Summer 2011, 25-42.
---------------------------------------------------------------------------
We also think it is important to observe that, despite our
inability to quantify the benefits, Congress has directed us to
promulgate this disclosure rule. Thus, we believe it reasonable to rely
on Congress's determination that the rule will produce the foreign
policy and other benefits that Congress sought in imposing this
mandate. Because Congress expressly directed us to undertake this
rulemaking and because it implicates important foreign policy
objectives, we decline to second-guess its apparent conclusion that the
benefits from this rule justify its adoption.
Moreover, as noted above, we concur with Congress' judgment that
the disclosures could help to achieve a critical foreign policy
objective of the U.S. Government. In reaching this conclusion, we are
particularly mindful that a broad international consensus has developed
regarding the potential benefits of revenue transparency. Not only have
the Canadian government \328\ and the European Union \329\ acknowledged
the potential social benefits by adopting disclosure requirements
similar to what we are proposing, but even members of industry through
their participation as stakeholders in EITI have acknowledged the
social benefits that revenue transparency can produce.\330\ Perhaps
most significantly, industry stakeholders in the EITI process (which
notably includes a number of industry organizations) \331\ have
expressly adopted the position that the EITI disclosures (which, as
noted above, now include project-level disclosures) produce
``[b]enefits for implementing countries'' by ``strengthening
accountability and good governance, as well as promoting greater
economic and political stability.'' \332\ Industry stakeholders in EITI
have similarly accepted the view that ``[b]enefits to civil society
come from increasing the amount of information in the public domain
about those revenues that governments manage on behalf of citizens,
thereby making governments more accountable.'' \333\
---------------------------------------------------------------------------
\328\ See, e.g., ESTMA, Section 6 (``The purpose of this Act is
to implement Canada's international commitments to participate in
the fight against corruption through the implementation of measures
applicable to the extractive sector, including measures that enhance
transparency and measures that impose reporting obligations with
respect to payments made by entities.''). See also ESTMA Guidance,
at 2 (``Canadians will benefit from increased efforts to strengthen
transparency in the extractive sector, both at home and abroad.
Alongside Canada, the United States and European Union countries
have put in place similar public disclosure requirements for their
respective extractive industries. Together these reporting systems
will contribute to raising global transparency standards in the
extractive sector.'').
\329\ See, e.g., European Commission Memo, ``New disclosure
requirements for the extractive industry and loggers of primary
forests in the Accounting (and Transparency) Directives (Country by
Country Reporting)--frequently asked questions'' (June 12, 2013)
(``The new disclosure requirement will improve the transparency of
payments made to governments all over the world by the extractive
and logging industries. Such disclosure will provide civil society
in resource-rich countries with the information needed to hold
governments to account for any income made through the exploitation
of natural resources, and also to promote the adoption of the
Extractive Industries Transparency Initiative (EITI) in these same
countries. . . . The reporting of payments to government by the
extractive and logging industries will provide civil society with
significantly more information on what specifically is paid by EU
companies to host governments in exchange for the right to extract
the relevant countries' natural resources. By requiring disclosure
of payments at a project level, where those payments had been
attributed to a specific project and were material, local
communities will have insight into what governments were being paid
by EU multinationals for exploiting local oil/gas fields, mineral
deposits and forests. This will also allow these communities to
better demand that government accounts for how the money had been
spent locally. Civil society will be in a position to question
whether the contracts entered into between the government and
extractive and logging companies had delivered adequate value to
society and government.'').
\330\ For example, in describing its involvement with EITI,
ExxonMobil states that these ``efforts to promote revenue
transparency have helped fight corruption, improve government
accountability and promote greater economic stability around the
world.'' See http://corporate.exxonmobil.com/en/current-issues/accountability/transparency/overview. Similarly, when discussing its
role in EITI, Chevron has acknowledged that revenue transparency is
``an important pathway to improved governance.'' See http://chevron.com/news/speeches/release/?id=2009-02-16-robertson. Royal
Dutch Shell has also expressed the position that ``[r]evenue
transparency provides citizens with an important tool to hold their
government representatives accountable and to advance good
governance.'' See http://www.shell.com/global/environment-society/society/business/payments-to-governments.html.
\331\ https://eiti.org/supporters/partnerorganizations.
\332\ https://eiti.org/eiti/benefits.
\333\ Id.
---------------------------------------------------------------------------
While the objectives of Section 13(q) do not appear to be ones that
would necessarily generate measurable, direct economic benefits to
investors or issuers, investors and issuers might benefit from the
proposed rule's indirect effects. In the following paragraphs, we
discuss existing theoretical arguments and empirical evidence that
reduced corruption and better governance could have longer term
positive impacts on economic growth and investment in certain countries
where the affected issuers operate, which could in turn benefit issuers
and their shareholders.
There are several theoretical causal explanations for why reducing
corruption might increase economic growth and political stability,
which in turn might reduce investment risk.\334\ High levels of
corruption could introduce inefficiencies in market prices as a result
of increased political risks and the potential awarding of projects to
companies for reasons other than the merit of their bids. This, in
turn, would prop up inefficient companies and limit investment
opportunities for others. These potential distortions could have a
negative impact on the economies of countries with high corruption,
particularly to the extent that potential revenue streams are
diminished or diverted. Additionally, the cost of corrupt expenditures,
direct or indirect, impacts profitability, and, if the cost is
sufficiently high, some potentially economically efficient or
productive investments may not be made. Thus, reducing corruption could
increase the
[[Page 80090]]
number of productive investments and the level of profitability of each
investment and could lead to improved efficiency in the allocation of
talent, technology, and capital. Insofar as these effects are realized,
each of them could benefit issuers operating in countries with reduced
corruption levels. These and other considerations form a basis for
several dynamic general equilibrium models predicting a negative
relationship between corruption and economic development.\335\
---------------------------------------------------------------------------
\334\ See, e.g., reviews by P. Bardhan, ``Corruption and
Development: A Review of Issues,'' Journal of Economic Literature,
35, no. 3, 1320-1346 (1997) and J. Svensson, ``Eight Questions about
Corruption'', Journal of Economic Perspectives, 19, no. 3, 19-42
(2005).
\335\ See, e.g., I. Ehrlich and F. Lui ``Bureaucratic Corruption
and Endogenous Economic Growth,'' Journal of Political Economy, 107
(6), 270-293 (1999); K. Blackburn, N. Bose, and E.M. Haque, ``The
Incidence and Persistence of Corruption in Economic Development'',
Journal of Economic Dynamics and Control 30, 2447-2467 (2006); and
C. Leite and J. Weidmann, ``Does Mother Nature Corrupt? Natural
Resources, Corruption, and Economic Growth'', International Monetary
Fund Working Paper No. 99/85 (July 1999).
---------------------------------------------------------------------------
A number of empirical studies have also shown that reducing
corruption might result in an increase in the level of GDP and higher
rate of economic growth through more private investments, better
deployment of human capital, and political stability.\336\ Other
studies find that corruption reduces economic growth both directly and
indirectly, through lower investments.\337\ To the extent that
increased transparency could lead to a reduction in corruption and, in
turn, improved political stability and investment climate, some
investors may consider such improvements in their investment decisions,
including when pricing resource extraction assets of affected issuers
operating in these countries.\338\ We note that some commenters
supported this view.\339\ There could also be positive externalities
from increased investor confidence to the extent that improved economic
growth and investment climate could benefit other issuers working in
those countries. Although we cannot state with certainty that such a
result might occur, we note that there is some empirical evidence
suggesting that lower corruption might reduce the cost of capital and
improve valuation for some issuers.\340\
---------------------------------------------------------------------------
\336\ See, e.g., P. Mauro, ``The effects of corruption on
growth, investment and government expenditure: A cross country
analysis,'' in K.A. Elliot (ed.) Corruption and the Global Economy,
Washington DC: Institute for International Economics, 83-107 (1997);
H. Poirson, ``Economic Security, Private Investment, and Growth in
Developing Countries'' International Monetary Fund Working Paper No.
98/4 (Jan. 1998); Institute for Economics and Peace, Peace and
Corruption Report (2015).
\337\ See Pak Hung Mo, ``Corruption and Economic Growth.''
Journal of Comparative Economics 29, 66-79 (2001); K. Gyimah-
Brempong, ``Corruption, economic growth, and income inequality in
Africa'', Economics of Governance 3, 183-209 (2002); and Pierre-
Guillaume M[eacute]on and Khalid Sekkat, ``Does corruption grease or
sand the wheels of growth?'', Public Choice 122, 69-97 (2005).
\338\ Several studies present evidence that reduction in
corruption increases foreign direct investments. See, e.g., S.-J.
Wei, ``How Taxing is Corruption on International Investors?'' NBER
Working Paper 6030 (1997) and G. Abed and H. Davoodi, ``Corruption,
Structural Reforms, and Economic Performance in the Transition
Economies,'' International Monetary Fund Working Paper No. 00/132
(July 2000).
\339\ See letter from Hermes Equity Ownership Services Ltd.
(Mar. 2, 2011) (``Hermes'') (anticipating 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).
\340\ See D. Kaufmann and S. J. Wei ``Does ``Grease Money''
Speed Up the Wheels of Commerce?'' NBER Working Paper 7093 (1999)
(finding, using survey evidence, that firms that pay fewer bribes
have lower, not higher, cost of capital) and C. Lee and D. Ng,
``Corruption and International Valuation: Does Virtue Pay?'' Journal
of Investing, 18, no. 4, 23-41 (2009) (finding that firms from more
corrupt countries trade at significantly lower market multiples).
---------------------------------------------------------------------------
Although there is no conclusive empirical evidence that would
confirm whether the project-level, public disclosure that we are
proposing will in fact reduce corruption, we note that many commenters
emphasized the potential benefits to civil society of such public
disclosure.\341\ Indeed, many of these commenters stated that the
benefits to civil society of project-level reporting in terms of
helping to reduce corruption and enhance accountability are
significantly greater than those of country-level reporting.\342\ As
discussed in Section I.E above, many of these commenters stated that
public availability of project-level data would enable civil society
groups and local communities to know how much their governments earn
from the resources that are removed from their respective territories.
This information would help empower them to advocate for a fairer share
of revenues, double-check government-published budget data, and better
calibrate their expectations from the extractive issuers.\343\ One
commenter further stated that project-level reporting would 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.\344\ Another commenter 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.'' \345\
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\341\ See, e.g., letters from Global Witness 1; NACE; Oxfam 1;
PWYP 1; PWYP-CAM; PWYP-IND; PWYP-ZIM; RWI 1; and Syena.
\342\ See letter from ERI 1; see also letter from Bill and
Melinda Gates Foundation (Feb. 9, 2012) (``Gates Foundation'') and
note 341 above.
\343\ See, e.g., 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).
\344\ See letter from ERI 1.
\345\ See letter from EG Justice 1.
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We also note that some commenters (including a number of large
investors) have stated that the disclosures required by Section 13(q)
could provide useful information to them in making investment
decisions.\346\ Although we do not believe this is the primary
objective of the required disclosures, we acknowledge the possibility
that the disclosures could provide potentially useful information to
certain investors. Some commenters, for example, noted that the new
disclosures could help investors better assess the risks faced by
resource extraction issuers operating in resource-rich countries.\347\
Other commenters compared the benefits of project-level and country-
level reporting. One commenter noted that project-level reporting would
enable investors to better understand the risk profiles of individual
projects within a given country, which could 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.\348\ This commenter indicated that project-
level disclosures would enable investors to better understand these
risks, whereas country-level reporting would allow issuers to mask
particularly salient projects by aggregating payments with those from
less risky projects. Some commenters noted that a further benefit of
project-level disclosures is that it would assist investors in
calculations of
[[Page 80091]]
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.\349\ While we acknowledge these comments,
we note that the incremental benefit to investors from this information
may be limited given that a significant number of the impacted issuers,
in particular all issuers that are not smaller reporting companies, are
already required to disclose their most significant risks in their
Exchange Act annual reports.\350\
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\346\ See letter from Calvert 1 (stating that payment
information could ``materially and substantially improve investment
decision making''). See also note 318 above and accompanying text.
\347\ See, e.g., letters from Calvert 1; ERI 2; Global Witness
1; PGGM; and Oxfam 1. Social, political, reputational, regulatory,
and tax risks were mentioned in the letters. Another commenter
maintained that transparency of payments is a better indicator of
risk for extractive issuers than the bond markets and is also a
better indicator of financial performance. See letter from Vale
Columbia Center (Dec. 16, 2011). The commenter did not provide
empirical evidence that compares transparency to bond market
indicators directly.
\348\ See letter from ERI 2. This commenter also 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.
\349\ See letter from Calvert Asset Management Company and SIF
(Nov. 15, 2010). But see note 350 above and accompanying text.
\350\ See Item 1A of Form 10-K and Item 3.D of Form 20-F. About
50 percent of affected issuers are smaller reporting companies and
they are not obligated to disclose in their Exchange Act annual
reports significant risk factors they face. For such companies, the
resource extraction projects payments disclosure could provide
incremental information that might benefit some investors, to the
extent that they would not otherwise have a requirement to disclose
the political or economic risks related to operating in resource-
rich countries. We do not, however, have data on whether such
companies have material operations in politically volatile regions
and whether they have exposure to risks described by commenters.
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2. Costs
a. Commenters' Views of Compliance Costs
Many commenters stated that the reporting regime mandated by
Section 13(q) would impose significant compliance costs on issuers.
Several commenters specifically addressed the cost estimates presented
in the Paperwork Reduction Act (``PRA'') section of the 2010 Proposing
Release.\351\ Other commenters discussed the costs and burdens to
issuers generally as well as costs that could have an effect on the PRA
analysis.\352\ As discussed 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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\351\ See letters from API 1; API 2; Barrick Gold; ERI 2;
ExxonMobil 1; ExxonMobil (Oct. 25, 2011) (``ExxonMobil 3''); NMA 2;
Rio Tinto; RDS 2; and RDS 4.
\352\ See, e.g., letters from BP 1; Chamber Energy Institute;
Chevron; Cleary; Hermes; and PWYP 1.
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Some commenters on the 2010 Proposing Release disagreed with our
industry-wide estimate of the total annual increase in the collection
of information burden and argued that it underestimated the actual
costs that would be associated with the rules.\353\ These and other
commenters stated that, depending upon the final rules adopted, the
compliance burdens and costs arising from implementation and ongoing
compliance with the rules would be significantly higher than those
estimated by the Commission.\354\ However, these commenters generally
did not provide any quantitative analysis to support their
estimates.\355\
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\353\ See letters from API 1 and ExxonMobil 1.
\354\ See letters from API 1; API 2; API 3; Barrick Gold;
ExxonMobil 1; NMA 2; Rio Tinto; and RDS 2.
\355\ See letters from API 1 and ExxonMobil 1. ExxonMobil 1 did
provide estimated implementation costs of $50 million if the
definition of ``project'' is narrow and the level of disaggregation
is high across other reporting parameters. This estimate is used in
our analysis below of the expected implementation costs.
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Commenters also noted that modifications to issuers' core
enterprise resource planning systems and financial reporting systems
would be necessary to capture and report payment data at the project
level, for each type of payment, government payee, and currency of
payment.\356\ These commenters estimated that the resulting initial
implementation costs of the 2010 Proposing Release would be in the tens
of millions of dollars for large issuers and millions of dollars for
many small issuers.\357\ Two of these commenters provided examples of
the modifications that would be necessary, including establishing
additional granularity to existing coding structures (e.g., splitting
accounts that contain both government and non-government payment
amounts), developing a mechanism to appropriately capture data by
``project,'' building new collection tools within financial reporting
systems, establishing a trading partner structure to identify and
provide granularity around government entities, establishing
transaction types to accommodate types of payment (e.g., royalties,
taxes, or bonuses), and developing a systematic approach to handle
``in-kind'' payments.\358\ These two commenters estimated that total
industry costs for initial implementation of the final rules could
amount to hundreds of millions of dollars.\359\
---------------------------------------------------------------------------
\356\ See letters from API 1; ExxonMobil 1; and RDS 2.
\357\ See letters from API 1; ExxonMobil 1; and RDS 2. These
commenters did not describe how they defined small and large
issuers.
\358\ See letters from API 1 and ExxonMobil 1.
\359\ See letters from API 1 and ExxonMobil 1.
---------------------------------------------------------------------------
These commenters added that these estimated costs could be
significantly greater depending on the scope of the final rules.\360\
They suggested, for example, that costs could increase depending on how
the final rules define ``project'' and whether the final rules require
reporting of non-consolidated entities, require ``net'' and accrual
reporting, or require an audit.\361\ Another commenter estimated that
the initial set up time and costs associated with the rules
implementing Section 13(q) would require 500 hours for the issuer to
change its internal books and records and $100,000 in information
technology consulting, training, and travel costs.\362\ One commenter
representing the mining industry estimated that start-up costs,
including the burden of establishing new reporting and accounting
systems, training local personnel on tracking and reporting, and
developing guidance to ensure consistency across reporting units, would
be at least 500 hours for a mid-to-large sized multinational
issuer.\363\
---------------------------------------------------------------------------
\360\ See letters from API 1; ExxonMobil 1; and RDS 2.
\361\ See letters from API 1; ExxonMobil 1; and RDS 2. As
previously discussed, the proposed rules do not require the payment
information to be audited or reported on an accrual basis, so
commenters' concerns about possible costs associated with these
items should be alleviated. See Section II.G.5 above.
\362\ See letter from Barrick Gold.
\363\ See letter from NMA 2.
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Two commenters stated that arriving at a reliable estimate for the
ongoing annual costs of complying with the rules would be difficult
because the rules were not yet fully defined but suggested that a
``more realistic'' estimate than the estimate included in the 2010
Proposing Release is hundreds of hours per year for each large issuer
that has many foreign locations.\364\ Commenters also indicated that
costs related to external professional services would be significantly
higher than the Commission's estimate, resulting primarily from XBRL
tagging and higher printing costs, although these commenters noted that
it is not possible to estimate these costs until the specific
requirements of the final rules are determined.\365\
---------------------------------------------------------------------------
\364\ 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).
\365\ See letters from API 1 and ExxonMobil 1.
---------------------------------------------------------------------------
One commenter estimated that ongoing compliance with the rules
implementing Section 13(q) would require 100-200 hours of work at the
head office, an additional 100-200 hours of work providing support to
its business units, and 40-80 hours of work each year by each of its
120 business units, resulting in an approximate yearly total of 4,800-
9,600 hours and $2,000,000-$4,000,000.\366\ One large
[[Page 80092]]
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.\367\ Another commenter representing the
mining industry estimated that, for an issuer with a hundred projects
or reporting units, the annual burden could be nearly 10 times the
estimated PRA burden set out in the 2010 Proposing Release.\368\ This
commenter 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 to comply with several aspects of the
rules proposed in 2010 that are not included in the current proposed
rules.\369\ This commenter also noted that the estimate in the 2010
Proposing Release did not adequately capture the burden to an
international company with multiple operations where a wide range of
personnel would need to be involved in capturing and reviewing the data
for the required disclosures as well as for electronically tagging the
information in XBRL format.\370\ A number of commenters submitted
subsequent letters reiterating and emphasizing the potential of the
proposed rules to impose substantial costs.\371\
---------------------------------------------------------------------------
\366\ 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.
\367\ See letter from Barrick Gold.
\368\ See letter from NMA 2.
\369\ See letter from NMA 2. Many of the time investments
outlined by this commenter would no longer apply to the proposed
rules or would be significantly reduced from when this commenter's
letter was submitted, such as the cost of seeking information from
non-consolidated ``controlled'' entities, obtaining compliance
advice on the application of undefined terms such as ``project,''
and reviews of the disclosure in connection with periodic
certifications under the Sarbanes Oxley Act. Certain potential costs
outlined in this letter, however, would still apply, such as those
associated with implementing new systems based on our proposed
definition of ``project'' and other definitions and costs associated
with attempting to secure an exemption from the Commission when
foreign law prohibitions on disclosure apply.
\370\ See letter from NMA 2.
\371\ See letters from API 2; ExxonMobil 3; and RDS 4.
---------------------------------------------------------------------------
Other commenters believed that concerns over compliance costs have
been overstated.\372\ One commenter stated that most issuers already
have internal systems in place for recording payments that would be
required to be disclosed under Section 13(q) and that many issuers
currently are subject to reporting requirements at a project
level.\373\ Another commenter anticipated that while the rules would
likely result in additional costs to resource extraction issuers, such
costs would be marginal in scale because, in the commenter's
experience, many issuers already have extensive systems in place to
handle their current reporting requirements and any adjustments needed
as a result of Section 13(q) could be done in a timely and cost-
effective manner.\374\ Another commenter believed that issuers could
adapt their current systems in a cost-effective manner because they
should be able to adapt a practice undertaken in one operating
environment to those in other countries without substantial changes to
the existing systems and processes of an efficiently-run
enterprise.\375\
---------------------------------------------------------------------------
\372\ See letters from ERI 2; Oxfam 1; PWYP 1; and RWI 1.
\373\ See letter from RWI 1 (noting that Indonesia requires
reporting at the production sharing agreement level and that
companies operating on U.S. federal lands report royalties paid by
lease).
\374\ See letter from Hermes.
\375\ See letter from RWI 1.
---------------------------------------------------------------------------
Another commenter stated that, in addition to issuers already
collecting the majority of information required to be made public under
Section 13(q) for internal record-keeping and audits, U.S. issuers
already report such information to tax authorities at the lease and
license level.\376\ This commenter added that efficiently-run issuers
should not have to make extensive changes to their existing systems and
processes to export practices undertaken in one operating environment
to another.\377\ However, another commenter disagreed that issuers
already report the payment information required by Section 13(q) for
tax purposes.\378\ This commenter also noted that tax reporting and
payment periods may differ.
---------------------------------------------------------------------------
\376\ See letter from PWYP 1.
\377\ See id. (citing statement made by Calvert Investments at a
June 2010 IASB-sponsored roundtable).
\378\ See letter from Rio Tinto (``[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.'').
---------------------------------------------------------------------------
One commenter, while not providing competing estimates, questioned
the accuracy of the assertions relating to costs from industry
participants.\379\ This commenter cited the following factors that 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. This
commenter also explained that issuers must keep records of their
subsidiaries' payments to governments as part of the books and records
provisions of the Foreign Corrupt Practices Act, so the primary costs
of reporting these payments would be in the presentation of the data
rather than any need to institute new tracking systems. This commenter
indicated that to the extent that issuers may need to implement new
accounting and reporting systems to keep track of government payments,
issuers presumably would need to develop mechanisms for receiving and
attributing information on individual payments regardless of the form
the final rules take. The commenter also observed that the 2010
proposed rules 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. This commenter observed that none of the commenters
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 commenters' bare assertions that
their ``marginal costs would be reduced very significantly.''
---------------------------------------------------------------------------
\379\ See letter from ERI 2.
---------------------------------------------------------------------------
b. Quantitative Estimates of Compliance Costs
To assess the potential initial and ongoing costs of compliance
with the proposed rules, we use the quantitative information supplied
by commenters in response to the 2010 Proposing Release.\380\ Our
general approach is to estimate the upper and lower bounds of the
compliance costs for each potentially affected issuer and then to sum
up these estimates to estimate the aggregate impact.\381\ As discussed
in Section III.A above, we estimate that, as of the end of 2014, 877
issuers would
[[Page 80093]]
be potentially affected by the proposed rules.\382\ However, in
determining which issuers are likely to bear the full costs of
compliance with the proposed rules, we make two adjustments to the list
of affected issuers. First, we exclude those issuers that would be
subject to foreign jurisdictions' rules substantially similar to our
proposed rules and therefore would likely already be bearing compliance
costs. Second, we exclude small issuers that likely could not have made
any payment above the proposed de minimis amount of $100,000 to any
government entity in 2014.
---------------------------------------------------------------------------
\380\ See letters from Barrick Gold, ExxonMobil 1, and Rio Tinto
discussed above in Section III.B.2.a. NMA also provided initial
compliance hours that are similar to Barrick Gold. See letter from
NMA 2. We do not have comment letters with more up-to-date
quantitative estimates of compliance costs.
\381\ We acknowledge that there may be some uncertainty
surrounding who will ultimately bear the compliance costs. Depending
on market conditions and the degree of competition, issuers may
attempt to pass some or all of their costs on to other market
participants. This consideration, however, does not change our
estimates.
\382\ We acknowledge that, as one commenter suggested, some of
these issuers are affiliated and thus are likely to share compliance
systems and fixed costs of creating such systems. See letter from
Publish What You Pay United States (Nov. 12, 2015) (``PWYP-US 2'').
Due to difficulties in determining affiliation status, however, we
have not attempted to eliminate these issuers from our estimates,
and therefore our estimates may overstate the potential costs.
Nevertheless, this potential overstatement of costs would not apply
in one of the cases we consider below, the case of no fixed costs,
because the costs would depend only on the total assets of affected
issuers, not on the number of them.
---------------------------------------------------------------------------
To address the first consideration, we searched the filed annual
forms and forms' metadata for issuers that have a business address, are
incorporated, or are listed on markets in the EEA or Canada. For
purposes of our analysis, we assume that those issuers may already be
subject to similar resource extraction payment disclosure rules in
those jurisdictions by the time the proposed rules are adopted and,
thus, that the additional costs to comply with our proposed rules would
be much lower than costs for other issuers. We identified 268 such
issuers.\383\
---------------------------------------------------------------------------
\383\ If we adopt an alternative reporting option as part of the
final rules, and the disclosure requirements of those jurisdictions
are subsequently deemed to be substantially similar to our rules,
then the additional cost would be negligible compared to compliance
costs we consider in this section.
---------------------------------------------------------------------------
Second, among the remaining 609 issuers (i.e., 877 minus 268) we
searched for issuers that, in the most recent fiscal year as of the
date of their annual report filing, have both revenues and absolute
value net cash flows from investing activities of less than the
proposed de minimis payment threshold of $100,000. Under those
financial constraints, such issuers are unlikely to have made any non-
de minimis and otherwise reportable payments to governments and would
be unlikely to be subject to the proposed reporting requirements. We
identified 138 such issuers.
Taking these estimates of the number of excluded issuers together,
we estimate that approximately 471 issuers (i.e., 877 minus 268 minus
138) would bear the full costs of compliance with the proposed
rules.\384\
---------------------------------------------------------------------------
\384\ Because it may be uncertain at the beginning of a
financial period as to whether payments from an issuer will exceed
the de minimis threshold by the end of such period, an excluded
issuer may incur costs to collect the information that would need to
be reported under the proposed rules even if that issuer is not
subsequently required to file an annual report on Form SD. To the
extent that excluded issuers incur such costs, our estimate may
understate the aggregate compliance costs associated with the
proposed rules.
---------------------------------------------------------------------------
To establish an upper and lower bound for the initial compliance
costs estimates, we use the initial compliance cost estimates from
Barrick Gold and ExxonMobil referenced above. We note, however, that
these cost estimates were provided by the commenters during the comment
period after the 2010 Proposing Release and were based on policy
choices made in that proposal and reflected the other international
regulatory regimes in place at that time. Since then we have changed
our approach (e.g., we have proposed to define the term ``control''
based on accounting principles, which we believe would be easier and
less costly for issuers to apply) \385\ and the international reporting
regimes have changed significantly.\386\ These developments are likely
to significantly lower the compliance costs associated with the
currently proposed rules. However, we do not have any reliable
quantitative assessment of the extent to which these changes would
reduce commenters' cost estimates and, thus, we use the original
commenters' estimates without adjustment.
---------------------------------------------------------------------------
\385\ See Section II.D above.
\386\ In this regard, we note that some affected issuers, even
if they are not subject to foreign disclosure rules, might have
subsidiaries or other entities under their control that are subject
to such rules. These issuers thus would face lower compliance costs
because they would already have incurred some of these costs through
such subsidiaries and other controlled entities.
---------------------------------------------------------------------------
In our methodology to estimate the initial compliance costs, we
take the specific issuer estimates from Barrick Gold and ExxonMobil,
$500,000 and $50,000,000, respectively,\387\ apply these costs to the
average issuer, and then multiply the costs by the number of affected
issuers. However, because Barrick Gold and ExxonMobil are very large
issuers and their compliance costs may not be representative of other
types of issuers, we apply these costs to all potentially affected
issuers as a percentage of total assets. This allows for the compliance
cost estimate for each potentially affected issuer to vary by their
size, consistent with our expectation that larger issuers will face
higher compliance costs. For example, we expect larger, multinational
issuers to need more complex payment tracking systems compared to
smaller, single country based issuers. This approach is consistent with
the method used in the 2012 Adopting Release, where we estimated the
initial compliance costs to be between 0.002% and 0.021% of total
assets.\388\
---------------------------------------------------------------------------
\387\ Barrick Gold estimated that it would require 500 hours for
initial changes to internal books and records and processes, and 500
hours for ongoing compliance costs. At an hourly rate of $400, this
amounts to $400,000 (1,000 hours * $400) for hourly compliance
costs. Barrick Gold also estimated that it would cost $100,000 for
initial IT/consulting and travel costs, for a total initial
compliance cost of $500,000. A similar analysis for ExxonMobil
estimated their initial compliance costs to be $50 million. See 2012
Adopting Release, Section III.D for details.
\388\ See 2012 Adopting Release at Section III.D for details
(the approach we use here is referred to as Method 1 in that
release). In the 2012 Adopting Release we also used another method
(referred to as Method 2) to estimate compliance costs. With Method
2, we first estimated the compliance costs for small and large
issuers (as determined by market capitalization) using the same
assumptions as in Method 1 that compliance costs are a constant
fraction of issuer's total assets (i.e., that all costs are variable
and there is no fixed component to the costs), and then aggregated
the compliance costs for all issuers. Although this approach was
intended to provide limited insight into any differential cost
impacts on small versus large issuers, it did not separate fixed and
variable cost components of the total compliance costs. Therefore,
it did not allow us to apply a differential cost structure to small
and large issuers. In addition, because of poor data availability
and data quality on market capitalization for small and foreign
issuers, the Method 2 approach may yield less accurate estimates
than the approach we use in this release (on the other hand, Method
1 could be properly applied because we collected total assets data
for all affected issuers). As a consequence, we now believe that the
disaggregation and subsequent aggregation of small and large issuer
cost estimates does not provide additional insights into the
difference in cost structure for small versus large issuers and any
effects of this difference on the aggregate costs. Consequently, we
have used only one estimation approach in this proposal. As
discussed below, however, we do believe that there is a fixed
component to the compliance costs which could potentially have a
differential impact on small issuers, and we have expanded the
Method 1 approach to allow for a fixed costs component in the cost
structure. We also request comments on both the fixed and variable
components of compliance costs to enable us to better quantitatively
estimate such impact.
---------------------------------------------------------------------------
We calculate the average total assets of the 471 potentially
affected issuers to be approximately $5.8 billion.\389\ Applying the
ratio of initial compliance costs to total assets (0.002%) from Barrick
Gold, we estimate the lower
[[Page 80094]]
bound of total initial compliance costs for all issuers to be $54.96
million (0.002% * $5,834,361,000 * 471). 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
$577.1 million (0.021% * $5,834,361,000 * 471). The table below
summarizes the upper and lower bound of total initial compliance costs
under the assumption that compliance costs vary according to the
issuer's size.
---------------------------------------------------------------------------
\389\ For the 471 potentially affected issuers, we collected
their total assets for the fiscal year that corresponds to their
Exchange Act annual reports for 2014 from XBRL filings that
accompany issuers' annual reports on EDGAR and from Compustat; if
these two data sources varied on an issuer's total assets, we used
the higher of the two values. For the remaining issuers that do not
have total assets data from either of these two data sources, we
manually collected the data on total assets from their filings. We
then calculated the average of those total assets across all issuers
that have the data.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Average issuer initial compliance costs assuming no fixed costs Calculation
----------------------------------------------------------------------------------------------------------------
Average 2014 total assets of all affected $5,834,361,000
issuers.
Average initial compliance costs per issuer 116,687 $5,834,361,000*0.002%
using Barrick Gold percentage of total
assets (lower bound).
------------------------------------------------------------------
Total initial compliance costs using 54,959,577 $116,687*471
Barrick Gold (lower bound).
------------------------------------------------------------------
Average initial compliance costs per issuer 1,225,216 $5,834,361,000*0.021%
using Exxon Mobil's percentage of total
assets (upper bound).
------------------------------------------------------------------
Total initial compliance costs using 577,076,736 $1,225,216*471
ExxonMobil (upper bound).
----------------------------------------------------------------------------------------------------------------
We also recognize that it is possible that some compliance costs
may not scale by issuer size and that smaller issuers in particular may
be subject to certain fixed costs that do not vary with the size of the
issuers' operations. While commenters did not provide any information
on what fraction of the initial compliance costs would be fixed versus
variable, we assume that fixed costs are equal to $500,000--the lower
of the two compliance cost estimates provided by commenters. To find
the lower and upper bound estimates of compliance costs in this case,
we assume that each issuer's costs are the maximum between the fixed
costs of $500,000 and, respectively, the lower bound (0.002% of total
assets) or the upper bound (0.021% of total assets) of the variable
costs. Applying these lower and upper bounds to each issuer and summing
across all issuers, we find that the lower bound estimate is $262
million (or, on average, $0.56 million per issuer) and the upper bound
estimate is $726 million (or, on average, $1.54 million per issuer).
The table below summarizes the upper and lower bound of total
initial compliance costs under two fixed costs assumptions.\390\ We
note that our upper bound estimates are consistent with two commenters'
qualitative estimates of initial implementation costs.\391\ We also
note that, if the actual fixed costs component is between $0 and
$500,000, the lower and upper bounds of compliance costs estimates
would be between our estimates for the two opposite cases.
---------------------------------------------------------------------------
\390\ The total estimated compliance cost for PRA purposes is
$79,302,480. See Section IV below. 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 and by only monetizing costs associated with outside
professional services. Therefore, despite using similar inputs for
calculating these costs, the PRA estimate differs from the lower and
upper bounds calculated above.
\391\ See letters from API 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.'') and ExxonMobil 1.
----------------------------------------------------------------------------------------------------------------
Initial compliance costs assuming no Initial compliance costs assuming
fixed costs fixed costs of $500,000
---------------------------------------------------------------------------
Costs for an Costs for an
average issuer Total costs average issuer Total costs
----------------------------------------------------------------------------------------------------------------
Lower bound......................... $116,687 $54,959,680 $557,092 $262,390,300
Upper bound......................... 1,225,216 577,076,700 1,540,969 725,796,600
----------------------------------------------------------------------------------------------------------------
We acknowledge significant limitations on our analysis that may
result in the actual costs being significantly lower. First, the
analysis is limited to two large issuers' estimates from two different
industries, mining and oil and gas, and the estimates may not
accurately reflect the initial compliance costs of all affected
issuers. Second, the commenters' estimates were generated based on our
initial proposal and they do not reflect the current proposed rules or
the international transparency regimes that subsequently have been
adopted by other jurisdictions.\392\
---------------------------------------------------------------------------
\392\ See, e.g., notes 179 and 386 and accompanying text.
---------------------------------------------------------------------------
We also acknowledge certain limitations on our analysis that could
potentially cause the cost to be higher than our estimates. First, we
assume that the variable part of the compliance costs is a constant
fraction of total assets, but the dependence of costs on issuer size
might not be linear (e.g., costs could grow disproportionally faster
than issuer assets). Second, commenters mentioned other potential
compliance costs not necessarily captured in this discussion of
compliance costs.\393\
---------------------------------------------------------------------------
\393\ 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, costs of
decreased ability to bid for projects in such countries in the
future, or costs of decreased competitiveness with respect to non-
reporting entities. Commenters generally did not provide estimates
of such costs. As discussed further below, we have attempted to
estimate the costs associated with potential foreign law
prohibitions on providing the required disclosure.
---------------------------------------------------------------------------
We estimate ongoing compliance costs using the same method under
the assumptions of no fixed costs and fixed costs of $200,000 per year
(as explained below). After the 2010 Proposing Release, we received
quantitative information from three commenters--Rio Tinto, National
Mining Association, and Barrick Gold--that we used in the
[[Page 80095]]
analysis.\394\ As in the 2012 Adopting Release, we use these three
comments to estimate the ongoing compliance costs as a percentage of
total assets to be 0.003%, 0.02%, and 0.0008%, respectively, and the
average ongoing compliance costs to be 0.0079% of total assets.\395\
For the no fixed costs case, we take the average total assets for all
affected issuers, $5,834,361,000, and multiply it by a constant
fraction (either the lower bound of 0.0008%, the average of 0.0079%, or
the upper bound of 0.02%) of total assets and the number of affected
companies (471) to get the total lower bound, the average, and the
upper bound of the annual ongoing compliance costs estimates.
---------------------------------------------------------------------------
\394\ See letters from Barrick Gold, Rio Tinto, and NMA 2. We
apply the same caveat as in the initial compliance cost estimates
above, namely, that these cost estimates were provided by the
commenters during the comment period after the 2010 Proposing
Release and were based on policy choices made in that proposal.
Changes made to the current proposal and recent international
developments could significantly lower the cost estimates.
\395\ We estimate the cost percentages the following way. Rio
Tinto estimated that it would take between 5,000 and 10,000 hours
per year to comply with the requirements, for a total ongoing
compliance cost of between $2 million (5,000*$400) and $4 million
(10,000*$400). We use the midpoint of their estimate, $3 million, as
their expected ongoing compliance cost. The National Mining
Association (NMA), which represents the mining industry, estimated
that ongoing compliance costs would be 10 times our initial estimate
from the 2010 Proposing Release, although it did not state
specifically the number to which it referred. We believe NMA was
referring to our proposed estimate of $30,000. Although this is the
dollar figure for total costs, NMA referred to it when providing an
estimate of ongoing costs, so we do the same here, which would
result in $300,000 (10*$30,000). Finally, Barrick Gold estimated
that it would take 500 hours per year to comply with the
requirements, or $200,000 (500*$400) per year. As with the initial
compliance costs, we calculate the ongoing compliance cost as a
percentage of total assets. Rio Tinto's total assets as of the end
of fiscal year 2009 were approximately $97 billion and their
estimated ongoing compliance costs as a percentage of assets is
0.003% ($3,000,000/$97,236,000,000). We calculated the average total
assets of the mining industry to be $1.5 billion, and using NMA's
estimated ongoing compliance costs, we estimate ongoing compliance
costs as a percentage of assets 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). See 2012 Adopting Release at Section III.D for
details.
---------------------------------------------------------------------------
Similarly to our estimates of the initial costs, we then consider
fixed costs equal to the lowest of three estimates given by the
commenters, the Barrick Gold's estimate of $200,000 per year. To find
the lower and upper bound estimates, we assume that each issuer's costs
are the maximum between the fixed costs of $200,000 and either the
lower bound (0.0008% of total assets) or the upper bound (0.02% of
total assets) of the variable costs, respectively. Applying these lower
and upper bounds to each issuer and summing across all issuers, we find
that the lower bound estimate is $105 million per year (or, on average,
$0.22 million per issuer per year) and the upper bound estimate is $601
million per year (or, on average, $1.28 million per issuer per year).
Our estimates are summarized in the following table. Finally, we note
that, if the actual fixed costs component is between $0 and $200,000,
the lower and upper bounds of compliance costs estimates would be
between our lower and upper bounds estimates for the two opposite fixed
costs cases.
----------------------------------------------------------------------------------------------------------------
Annual ongoing compliance costs Annual ongoing compliance costs
under the assumption of no fixed under the assumption of fixed costs
costs of $200,000
---------------------------------------------------------------------------
Costs for an Costs for an
average issuer Total costs average issuer Total costs
----------------------------------------------------------------------------------------------------------------
Lower bound......................... $46,675 $21,983,870 $222,837 $104,956,100
Average............................. 460,915 217,090,700 588,790 277,320,000
Upper bound......................... 1,166,872 549,596,800 1,275,390 600,708,700
----------------------------------------------------------------------------------------------------------------
As noted above, we expect that the initial and ongoing compliance
costs associated with the proposed rule are likely to be greater for
larger, multinational issuers as compared to smaller, single country
based issuers, as larger issuers would likely need more complex systems
to track and report the required information. However, to the extent
there is a significant fixed component to the proposed rules' overall
compliance costs, such costs could be disproportionately burdensome for
smaller reporting companies and emerging growth companies. In this
case, the proposed rules could give rise to competitive disadvantages
for these smaller issuers and could provide incentive for these issuers
to consider exiting public capital markets to avoid reporting
requirements (possibly incurring a higher cost of capital and
potentially limited access to capital in the future). We estimate that
approximately 50% of affected issuers are smaller reporting companies
and approximately 6% of affected issuers are emerging growth
companies.\396\ Given the transparency goals of the statute and the
fact that smaller issuers constitute a significant portion of the
public reporting companies making resource extraction payments,
exempting these issuers from the proposed rules could significantly
diminish the expected benefits of the required disclosure. To help us
better understand the potential impact of the proposed rules on smaller
issuers, we are soliciting comment on the degree to which compliance
costs are likely to vary by issuer size and complexity of operations
and our overall approach to estimating these costs, as outlined above.
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\396\ As discussed in this section above, our estimate of the
number of affected issuers already excludes 138 issuers whose
reported revenues and net cash flows from investing activities
suggest that they are unlikely to make payments above the proposed
de minimis threshold. If we apply a significantly higher threshold
($250,000, $500,000, $750,000, or $1,000,000) to revenues and cash
flows from investing to estimate the number of such issuers, we
would exclude a slightly higher number of issuers from our cost
estimates (169, 201, 214, or 227, respectively). Nonetheless, for
the reasons described above, we believe that we have proposed to set
the de minimis threshold at an appropriate level. See Section II.C.2
above.
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c. Indirect Costs and Competitive Effects
In addition to direct compliance costs, we anticipate that the
statute could result in significant indirect effects. Issuers that have
a reporting obligation under Section 13(q) could have a competitive
disadvantage compared 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.
[[Page 80096]]
Industry commenters 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.\397\ Other commenters 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.\398\ In either event, 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.\399\ In addition, any competitive impact should be
substantially reduced to the extent that other jurisdictions, such as
the European Union and Canada, have adopted laws that require
disclosure similar to the disclosure required by Section 13(q) and the
proposed rules.\400\ We note, however, that to the extent that
commenters are accurate in their assessment of competitive effects
arising from such disclosure requirements, some U.S. issuers that would
not be subject to the EU Directives or other international disclosure
regimes might lose some of their competitive advantage from not being
obligated to disclose their resource extraction payments.
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\397\ See letters from API 1; ExxonMobil 1; and RDS 2.
\398\ See letters from PWYP 1 and Oxfam 1.
\399\ In this regard, we note that one commenter provided
several examples of countries in which payments are publicly
disclosed on a lease or concession level. See letter from PWYP 3.
\400\ One commenter suggested that if both the United States and
European Union implement disclosure requirements regarding payments
to governments ``around 90% of the world's extractive companies will
be covered by the rules.'' See letter from Arlene McCarthy (Aug. 10,
2012) (Ms. McCarthy is a member of the European Parliament and the
parliamentary draftsperson on the EU transparency rules for the
extractive sector).
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To the extent that the requirement to disclose payment information
does impose a competitive disadvantage on an issuer, such issuer
possibly could be motivated to sell assets affected by such competitive
disadvantage at a price that does not fully reflect the value of such
assets absent such competitive impact.\401\ Additionally, resource
extraction issuers operating in countries which prohibit, or could in
the future prohibit, the disclosure required under the proposed rules
could bear substantial costs.\402\ One commenter noted that tens of
billions of dollars of capital investments could potentially be put at
risk if issuers were required to disclose, pursuant to our proposed
rules, information prohibited by the host country's laws or
regulations.\403\ As explained above, pursuant to our existing Exchange
Act authority, the Commission will consider requests for exemptive
relief on a case-by-case basis and may grant such relief, if and when
warranted. The economic implications of providing such relief are
discussed below in Section III.C.1.
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\401\ For example, a study on divestitures of assets find that
issuers that undertake voluntary divestitures have positive stock
price reactions, but also finds that issuers forced to divest assets
due to action undertaken by the antitrust authorities suffer a
decrease in shareholder value. See Kenneth J. Boudreaux,
``Divestiture and Share Price.'' Journal of Financial and
Quantitative Analysis 10 (Sept. 1975), 619-26. See also, G. Hite and
J. Owers. ``Security Price Reactions around Corporate Spin-Off
Announcements.'' Journal of Financial Economics 12 (Dec. 1983), 409-
36 (finding that issuers spinning off assets because of legal/
regulatory difficulties experience negative stock returns).
\402\ See 2012 Adopting Release, nn.52-53 and accompanying text.
\403\ See letter from RDS 4.
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Addressing other potential costs, one commenter referred to a
potential economic loss borne by shareholders, without quantifying such
loss, which the commenter believed could result from highly
disaggregated public disclosure of competitively sensitive information
causing competitive harm.\404\ The commenter also noted resource
extraction issuers could suffer competitive harm because they could be
excluded from many future projects altogether. One commenter also noted
that because energy underlies every aspect of the economy, these
negative impacts could potentially have repercussions well beyond
resource extraction issuers.\405\
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\404\ See letter from API 1.
\405\ See letter from API 1.
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Some commenters suggested that we permit issuers to submit payment
data confidentially to the Commission and make public only an
aggregated compilation of the information.\406\ The commenters
suggesting that the Commission make public only a compilation of
information stated that such an approach would address many of their
concerns about the disclosure of commercially sensitive or legally
prohibited information and would significantly mitigate the costs of
the mandatory disclosure under Section 13(q). As noted above, we did
not permit confidential submissions in the 2012 Rules, and the current
proposed rules are generally consistent with that approach. As a
result, the proposed rules require public disclosure of the
information. We note that in situations involving more than one
payment, the information would be aggregated by payment type,
government, and/or project, which may limit the ability of competitors
to use the publicly disclosed information to their advantage. In
addition, as discussed above, the Commission will consider applications
for exemptive relief from the proposed disclosure requirements on a
case-by-case basis and may grant such relief, if and when
warranted.\407\
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\406\ See note 242 above and accompanying text.
\407\ See Section II.G.3 above.
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As noted above, the cost of compliance for this provision would be
primarily borne by the issuer thus potentially diverting capital away
from other productive opportunities which may result in a loss of
allocative efficiency.\408\ Such effects may be partially offset over
time if increased transparency of resource extraction payments reduces
corrupt practices by governments of resource-rich countries and in turn
helps promote improved economic development and higher economic growth
in those countries. In this regard, as we noted above in Section
III.B.1, a number of economic studies have shown that reducing
corruption can help promote higher economic growth through more private
investments, better deployment of human capital, and political
stability.\409\
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\408\ See letter from Chevron. See also letter from Chairman
Bachus and Chairman Miller. As discussed above in note 381, there is
some uncertainty regarding who would bear the ultimate costs of
compliance. Regardless of who bears the majority of the compliance
costs, we believe that the effects on allocative efficiency and
capital flows would likely be similar.
\409\ See note 336 above and accompanying text.
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C. Potential Effects Resulting From Specific Implementation Choices
As discussed in detail in Section II, we have revised the rules
from the 2010 Proposing Release and the 2012 Adopting Release to
address matters identified in the U.S. District Court for the District
of Columbia's decision in the API Lawsuit. In developing the proposed
rules, we have also considered relevant international developments,
input from staff consultations with other U.S. Government agencies, and
the public comments that we have received. We discuss below the
significant choices that we are proposing to implement the statute and
the associated benefits and costs of those choices. We are unable to
quantify the impact of each of the proposals we discuss below with any
precision because reliable, empirical evidence about the effects is not
readily available to the Commission. We do, however,
[[Page 80097]]
request that commenters provide us with any empirical evidence relating
to these various choices to the extent that they can.
1. Exemption From Compliance
Absent potential exemptive relief, resource extraction issuers
operating in countries which prohibit, or may in the future prohibit,
the disclosure required under Section 13(q) could bear substantial
costs.\410\ Such costs could arise if issuers have to choose between
ceasing operations in certain countries or violating local law, or if
the country's laws have the effect of preventing them from
participating in future projects. Some commenters asserted that four
countries currently have such laws.\411\ Other commenters disputed the
assertion that there are foreign laws that specifically prohibit
disclosure of payment information.\412\
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\410\ See 2012 Adopting Release, nn.52-53 and accompanying text.
\411\ See letters from API 1 and ExxonMobil 1 (mentioning
Angola, Cameroon, China, and Qatar). See also letter from RDS 2
(mentioning Cameroon, China, and Qatar).
\412\ See, e.g., letters from ERI 3; Global Witness 1; OpenOil;
PWYP 1; PWYP 3; and Rep. Frank et al.
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A foreign private issuer with operations in a country that
prohibits disclosure of covered payments, or a foreign issuer that is
domiciled in such country, might face different types of costs. For
example, it might decide it is necessary to delist from an exchange in
the United States, deregister, and cease reporting with the
Commission,\413\ thus incurring a higher cost of capital and
potentially limited access to capital in the future. Shareholders,
including U.S. shareholders, might in turn suffer an economic and
informational loss if an issuer decides it is necessary to deregister
and cease reporting under the Exchange Act in the United States as a
result of the proposed rules.
---------------------------------------------------------------------------
\413\ See letter from Berns.
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Affected issuers also could suffer substantial losses if they have
to terminate their operations and redeploy or dispose of their assets
in the host country under consideration. These losses would be
magnified if an issuer cannot redeploy the assets in question easily,
or it has to sell them at a steep discount (a fire sale). Even if the
assets could be easily redeployed, an issuer could suffer opportunity
costs if they are redeployed to projects with inferior rates of return.
In the 2012 Adopting Release we estimated that such losses could amount
to billions of dollars.
A number of factors may serve to mitigate the costs and competitive
burdens arising from the impact of foreign laws on the required
disclosure. For example, the widening global influence of the EITI and
the recent trend of other jurisdictions to promote transparency,
including listing requirements adopted by the Hong Kong Stock Exchange
and the requirements adopted pursuant to the EU Directives and ESTMA,
may discourage governments in resource-rich countries from rigorously
enforcing any such prohibitions or from adopting new prohibitions on
payment disclosure.\414\ Resource extraction issuers concerned that
disclosure required by Section 13(q) may be prohibited in a given host
country may also be able to seek authorization from the host country to
disclose such information.\415\ Commenters did not provide estimates of
the cost that might be incurred to seek such an authorization.
---------------------------------------------------------------------------
\414\ See 2012 Adopting Release, n.15 and n.48, and the
discussion in Section I above.
\415\ For example, according to some commenters, the Minister of
Petroleum may provide formal authorization for the disclosure of
information about a reporting issuer'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.
---------------------------------------------------------------------------
In addition, these potential costs could be substantially mitigated
under our proposed rules. We intend to consider using our existing
authority under the Exchange Act to provide exemptive relief on a case-
by-case basis, if and when warranted, upon the request of a resource
extraction issuer.\416\ As mentioned above, we believe that a case-by-
case approach to exemptive relief using our existing authority is
preferable to either including within the final rules a blanket
exemption for a foreign law prohibition (or for any other reason) or
providing no exemptions and no avenue for exemptive relief under this
or other circumstances. The proposed approach should significantly
decrease compliance and economic costs to the extent that issuers are
able to demonstrate that an exemption where host country laws prohibit
disclosure is warranted. Indeed, assuming such laws exist and are
enforced and that issuers are able to make the required demonstration
for an exemption to our proposed rules, this approach could potentially
save affected issuers billions of dollars in compliance and economic
costs.\417\
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\416\ For example, an issuer would be able to request exemptive
relief in situations where the required payment disclosure is
prohibited under the host country's laws. See discussion in Section
II.G.3 above.
\417\ We note, however, that in addition to reducing costs,
granting an exemption might diminish some of the benefits of
enhanced transparency as well.
---------------------------------------------------------------------------
An alternative to using our exemptive authority on a case-by-case
basis would be to provide a blanket or per se exemption where specific
countries have a law prohibiting the required disclosure. Although a
blanket exemption would reduce potential economic costs (e.g., costs of
relocating assets) and compliance costs (e.g., costs associated with
applying for the exemption) for affected issuers, it could create a
stronger incentive for host countries that want to prevent transparency
to pass laws that prohibit such disclosure, potentially undermining the
purpose of Section 13(q) to compel disclosure in foreign countries that
have failed to voluntarily do so.\418\ It also would remove any
incentive for issuers to diligently negotiate with host countries for
permission to make the required disclosures. Furthermore, it would make
it more difficult to address any material changes over time in the laws
of the relevant foreign countries, thereby resulting in an outdated
blanket exemption. By contrast, the tailored case-by-case exemptive
approach we are contemplating would provide a more flexible and
targeted mechanism for the Commission to address potential cost
concerns without creating incentives for host countries to enact laws
prohibiting disclosure to the extent that the exemptive relief is not
universally granted.
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\418\ See, e.g., 156 Cong. Rec. S3815 (May 17, 2010) (Statement
of Senator Cardin) (``We currently have a voluntary international
standard for promoting transparency. . . . But too many countries
and too many companies remain outside this voluntary system.''). We
also note that a blanket exemption would incentivize host countries
that want to prevent transparency to enact laws prohibiting the
disclosure without suffering the cost of decreasing the number of
potential bidders on--and competition for--projects within their
jurisdictions, and thus without the cost of decreasing the potential
value realized to the host country from awarding a contract.
---------------------------------------------------------------------------
Finally, we believe that the more tailored case-by-case exemptive
approach that we are proposing could improve 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. Also, although not providing a blanket exemption
could encourage issuers to not list on U.S. markets, to the extent that
other jurisdictions are developing and adopting similar initiatives
(e.g., the EU and Canada), the advantage to those
[[Page 80098]]
issuers from not being subject to the proposed rules will diminish.
As discussed above, host country laws that prohibit the type of
disclosure required under the proposed rules could lead to significant
additional economic costs that are not captured by the compliance cost
estimates in Section III.B.2.b. We believe that affording exemptive
relief from the proposed disclosure requirements on a case-by-case
basis, as circumstances warrant, should substantially mitigate such
costs. However, we acknowledge that, if this relief were not provided,
issuers could potentially incur costs associated with the conflict
between our requirements and those foreign law prohibitions. Below, we
have attempted, to the extent possible, to assess the magnitude of
those potential costs if exemptive relief were not granted.
We base our analysis on the four countries that some commenters
claimed have versions of such laws.\419\ We searched (through a text
search in the EDGAR system) the Forms 10-K, 40-F, and 20-F of affected
issuers for year 2014 for any mention of Angola, Cameroon, China, or
Qatar. We found that, out of 471 potentially affected issuers, 163
mentioned one of these four countries. However, only 49 of them
described any activity in one of these four countries and 114 mentioned
these countries for other, unrelated reasons. An examination of these
49 filings indicates that most filings did not provide detailed
information on the extent of issuers' operations in these
countries.\420\ Thus, we are unable to determine the total amount of
capital that could be lost in these countries if the information
required to be disclosed under the proposed rules is, in fact,
prohibited by laws or regulations and exemptive relief is not provided.
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\419\ See letters from API 1 and ExxonMobil 1 (mentioning
Angola, Cameroon, China, and Qatar); see also letter from RDS 2
(mentioning Cameroon, China, and Qatar). Other commenters 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; PWYP 3; and Rep. Frank et al.
\420\ We note that some resource extraction 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 commenter's estimate of tens of billions
of dollars.\421\ To do this, we first estimate the market value of
assets that an issuer currently owns in a country with such laws. We
then discuss how the presence of various opportunities for the use of
those assets by the issuer or another entity would affect the size of
the issuer's potential losses. We also discuss how these losses would
be affected if an issuer cannot redeploy the assets in question easily,
or it has to sell them with a steep discount (a fire sale). In order to
estimate the market value of assets located in one of these countries,
we use Compustat geographic segments data extracted from annual reports
to find the fraction of book value of such assets in the issuer's total
assets and assume that the market value of such assets is the same
fraction of the issuer's total market value.\422\
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\421\ See letter from RDS 4.
\422\ This approach assumes that valuation of assets of a firm
is the same regardless of where these assets are geographically
located. Not all of the assets located in these host countries might
be related to resource extraction payments, which disclosure can
trigger their sale or loss; however, we choose the conservative
approach and err on the side of overestimating the losses.
---------------------------------------------------------------------------
As we discuss above, we were able to identify a total of 49 issuers
that mentioned that they are active in these countries (some operate in
more than one country). The table below provides information from the
20 issuers, out of the 49 described above, that provide geographic
segment data detailed at the country level and that specifically
identify the value of assets in one of these four countries.\423\ We
expect that the actions in response to the foreign law prohibition and
the nature of costs that issuers might face would be different for
issuers domiciled in the United States and in foreign jurisdictions;
therefore, we consider these two types of filers separately.
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\423\ As noted above, we identified 49 issuers that discussed
their activities in at least one of the four countries, but only 20
of the issuers provided country-level geographic segment information
for those countries that was specific enough to use in our analysis
(some issuers may have determined that they were not required to
provide detailed information in their filings and others might not
have any assets in these countries). In the table, Country Assets
are defined as either Long-lived Assets, Identifiable Total Assets,
or Property, Plant & Equipment, whichever was disclosed; Country
Assets Fraction in Total Assets is Country Assets/Total Assets; and
Market Value Estimate of Country Assets is Country Assets Fraction
in Total Assets * Company Market Value, where Company Market Value
is calculated as Consolidated Company-Level Market Value of Common
Equity + Total Debt + Preferred Stock Liquidating Value - Deferred
Taxes and Investment Tax Credits if all these values were available.
For some issuers we were not able to identify their company-level
market values, and, thus, we were not able to determine their Market
Value Estimate of Country Assets. All Compustat data is the latest
annual data disclosed on or before the date of the company's 2014
Form 10-K or 20-F filing.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Country assets Market value
Domicile (business Country assets Total assets fraction in estimate of
Issuer Form type address) Host country ($ mil) ($ mil) total assets country assets
(percent) ($ mil)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1......................... 10-K Foreign.............. China................ 23.2 23.2 100.0 ..............
2......................... 10-K Foreign.............. China................ 309.2 309.2 100.0 93.8
3......................... 10-K Foreign.............. China................ 195.9 195.9 100.0 75.8
4......................... 10-K Foreign.............. China................ 25.1 25.1 100.0 19.5
5......................... 10-K Foreign.............. China................ 17.1 17.1 100.0 91.6
6......................... 20-F Foreign.............. China................ 499.6 499.6 100.0 82.2
7......................... 20-F Foreign.............. China................ 8,712.2 21,054.6 41.4 ..............
8......................... 20-F Foreign.............. China................ 276,542.6 386,889.0 71.5 ..............
9......................... 10-K U.S.................. Angola............... 8,262.0 346,808.0 2.4 9,674.4
10........................ 10-K U.S.................. Angola............... 11.5 308.2 3.7 14.7
11........................ 10-K U.S.................. Cameroon............. 166.5 4,507.2 3.7 168.2
12........................ 10-K U.S.................. China................ 388.0 35,742.0 1.1 209.5
13........................ 10-K U.S.................. China................ 355.0 4,084.0 8.7 369.9
14........................ 10-K U.S.................. China................ 542.0 9,321.0 5.8 343.5
15........................ 10-K U.S.................. China................ 125.1 125.1 100.0 46.9
16........................ 10-K U.S.................. China................ 96.5 96.5 100.0 1.5
17........................ 10-K U.S.................. China................ 2,143.0 118,057.0 1.8 1,689.2
18........................ 10-K U.S.................. China................ 15.0 845.2 1.8 28.8
19........................ 10-K U.S.................. China................ 53.1 3,006.8 1.8 50.4
[[Page 80099]]
20........................ 10-K U.S.................. Qatar................ 2,605.0 69,443.0 3.8 2,830.0
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The magnitude of potential total loss of assets in the host
countries is represented in the last column of the table, the estimated
market value of country assets. For the 12 issuers domiciled in the
United States that have assets in one of these four host countries, the
estimated total loss range is between $1.5 million and $9.7 billion,
with a median loss of $188.8 million. The aggregate fraction of total
assets that might be affected is 2.5%.\424\ We note that these
estimates apply only to issuers that have assets in one of the host
countries.
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\424\ Total assets of all U.S.-based firms located in these host
countries divided by total worldwide assets of the same firms.
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As shown in the table above, eight issuers have a foreign address
associated with their Form 10-K or 20-F filing. As we discussed above,
issuers that are domiciled in foreign countries might face different
types of costs. For example, they are more likely to decide it is
necessary to delist from an exchange in the United States, deregister,
and cease reporting with the Commission, thus incurring a higher cost
of capital and potentially limited access to capital in the future,
rather than to sell their assets abroad. Due to limited data
availability, we cannot reliably quantify these costs.
Even though our analysis was limited to less than half of issuers
that are active in these four countries, these estimates suggest that
commenters' concerns about such host country laws potentially adding
billions of dollars of costs to affected issuers could be warranted.
Additional costs at that scale could have a significant impact on
resource extraction issuers' profitability and competitive position.
The analysis above assumes that a total loss of assets located in the
host countries would occur. In a more likely scenario, however, these
issuers would be forced to sell their assets in the above-mentioned
host countries at fire sale prices. While we do not have data on fire
sale prices for the industries of the affected issuers, economic
studies on fire sales of real assets in other industries could provide
some estimates to allow us to quantify the potential costs to affected
issuers from having to sell assets at fire sale prices. For example, a
study on the airline industry finds that planes sold by financially
distressed airlines bring 10 to 20 percent lower prices than those sold
by undistressed airlines.\425\ Another study on aerospace plant
closings finds that all groups of equipment sold for significant
discounts relative to estimated replacement cost.\426\ The discounts on
machine tools, instruments, and miscellaneous equipment were estimated
to be between 63 and 69 percent. The analysis also suggests that the
most specialized equipment appears to have suffered substantially
higher discounts than the least specialized equipment, which may be
relevant to the extractive industry to the extent that a project would
not have many potential alternative suitors should it need to be
disposed of due to a conflict between the proposed rules and foreign
laws. Other studies provide estimates of fire sale discounts for forced
house sales (about 3-7 percent for forced sales due to death or
bankruptcy and about 27 percent for foreclosures) \427\ and sales of
stand-alone private firms and subsidiaries (15-30 percent relative to
comparable public acquisition targets).\428\ These estimates suggest a
possible range for the fire sale discount from 3 to 69 percent.
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\425\ See Todd Pulvino 1998. ``Do Fire-Sales Exist? An Empirical
Study of Commercial Aircraft Transactions.'' Journal of Finance,
53(3): 939-78.
\426\ See Ramey, V.A., Shapiro, M.D. 2001. ``Displaced Capital:
A Study of Aerospace Plant Closings.'' Journal of Political Economy,
109: 958-92.
\427\ See Campbell, John Y., Stefano Giglio, and Parag Pathak
2011. ``Forced Sales and House Prices.'' American Economic Review,
101: 2108-31.
\428\ See Officer, M.S. 2007. ``The Price of Corporate
Liquidity: Acquisition Discounts for Unlisted Targets.'' Journal of
Financial Economics, 83: 571-98.
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To understand how relevant these discounts are to the resource
extraction issuers affected by the rule, we examine the ease with which
real assets could be disposed of in different industries. If the forced
disposal of real assets is more easily facilitated in the resource
extraction industries compared to other industries (i.e., there is a
more liquid market for those assets), then the lower range of the fire
sale discounts will be more appropriate to estimate potential losses
due to the foreign law prohibitions. We measure the ease with which
issuers in a given industry could sell their assets by a liquidity
index.\429\ The index is defined as the ratio of the value of corporate
control transactions \430\ in a given year to the total book value of
assets of firms in the industry for that year. We believe that this
ratio captures the general liquidity of assets in an industry because
it measures the volume of the type of transactions that companies rely
on when divesting real assets. Additionally, one economic study finds
that the liquidity of the market for corporate assets, as measured by
the liquidity index, plays an important role in explaining assets
disposals by companies.\431\
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\429\ See Frederic Schlingemann, Rene Stulz, and Ralph Walkling
2002. ``Divestitures and the Liquidity of the Market for Corporate
Assets.'' Journal of Financial Economics, 64: 117-144. The index
value is between 0 and 1. A higher value of the index for an
industry indicates that this is an industry with a more liquid
market for corporate assets and a firm in that industry would be
able to sell its real assets easier and at smaller loss than a firm
in an industry with a lower liquidity index.
\430\ As corporate control transactions, we consider all
completed or pending leveraged buyouts, tender offers, spinoffs,
exchange offers, minority stake purchases, acquisitions of remaining
interest, privatizations, and equity carve-outs of U.S. targets. We
exclude buybacks (e.g., repurchases and self-tenders) from the
sample. Data on these transactions comes from Thomson Financial's
Mergers & Acquisitions and New Issues databases. Data on the book
value of total assets is taken from Compustat.
\431\ See Frederic Schlingemann, Rene Stulz, and Ralph Walkling
2002. ``Divestitures and the Liquidity of the Market for Corporate
Assets.'' Journal of Financial Economics, 64: 117-144.
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We note, however, that the index, as constructed, will also reflect
the industry's typical financial leverage, not just the liquidity of
its assets. To the extent that different industries have different
leverages, these differences in leverage could explain some of the
cross-industry variation of the index. Additionally, the index measures
the ease with which ownership of assets is changed over the time period
under consideration. Hence, the index is expected to adjust to
intertemporal changes in the ease with which assets in a certain
industry can be disposed of, which is important because it is well-
established that control transactions tend to be cyclical in
nature.\432\
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\432\ Gregor Andrade, and Erik Stafford, 2004. ``Investigating
the economic role of mergers.'' Journal of Corporate Finance 10: 1-
36.
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We construct the index for all industries, identified by three-
digit SIC codes. For each industry, after
[[Page 80100]]
estimating the value of the index in each year during the period 2010-
2014, we calculate the average over the five year period. Several
industries have a liquidity index greater than 1; in those cases we cap
the index level at 1.
The table below presents summary statistics for the liquidity index
for all industries and the resource extraction industries during the
period 2010-2014.
------------------------------------------------------------------------
Index value
------------------------------------------------------------------------
All other industries:
Mean..................................................... 0.11
Median................................................... 0.03
Top quartile............................................. 0.09
Bottom quartile.......................................... 0.01
Industries with similar financial leverage:
Mean..................................................... 0.08
Median................................................... 0.02
Top quartile............................................. 0.10
Bottom quartile.......................................... 0.01
Resource extraction issuers:
Mean..................................................... 0.02
Median................................................... 0.01
------------------------------------------------------------------------
The results in the table show that the liquidity of real assets in
the resource extraction industries is low (an average liquidity index
of 0.02) compared with the liquidity in other industries (an average
liquidity index of 0.11). That is, it is harder to dispose of assets in
the extractive industries relative to other industries. In fact, the
liquidity index of resource extraction industries is in the lowest
quartile of the distribution of the index for all industries. As
mentioned above, this could reflect the fact that resource issuers have
higher financial leverage than other industries. All other things being
equal, higher financial leverage will result in a lower liquidity
index. To control for the effects of financial leverage, we compare the
liquidity index of resource extraction industries to that of industries
with similar leverage.\433\ As the results of this comparison show,
resource extraction industries have lower liquidity index values even
when compared to industries with similar levels of financial leverage:
A median of 0.01 for the resource extraction industries compared to a
median of 0.02 for industries with similar financial leverage.\434\
This suggests that affected issuers may still experience difficulty in
disposing of some of their real assets relative to other industries
with similar leverage levels when a need arises. It should be noted,
however, that the liquidity index estimates the liquidity of the real
assets at the industry level, not at the level of a country with
disclosure prohibition laws. It is possible that in some of these
countries the ability of an affected issuer to dispose of assets could
be more or less constrained than that at the industry level.
---------------------------------------------------------------------------
\433\ We first estimate the median market leverage of the
resource extraction industries during the period 2010-2014. Market
leverage is defined as the ratio Total debt/(Total debt + Market
value of equity). We then classify as similar those industries whose
median market leverage that is within -/+ 10% of the median market
leverage of the resource industries for the same time period, There
are six industries that are similar to the resource extraction
industries based on this criterion. Data on total debt and market
value of equity comes from Compustat.
\434\ We note that many factors may drive the choice of leverage
within a given industry, and some of these factors may also affect
the industry's liquidity index. Thus, the industries that have
leverage that is similar to that of the resource extraction
industries may be very different in some other aspects (e.g., growth
opportunities or intensity of competition) and that could explain
the differences in their liquidity indices and the liquidity index
of the resource extraction industries.
---------------------------------------------------------------------------
Because we lack data to construct the liquidity index at the
country level, we cannot quantify the liquidity of the single-country
market for real assets. The table below lists the number of corporate
control transactions in each of the four countries under consideration
from 2010 through 2014, broken down by type of industry.\435\ As seen
from the table, China is by far the most active market for corporate
control transactions among the four countries, although on a percentage
basis more deals involving resource extraction industries occur in
Angola, Cameroon, and Qatar. Although the number of relevant
transactions gives some indication of how liquid the market in each
country is, without knowing the size of the discounts and the types of
companies involved in these deals (e.g., small or large) we cannot
conclusively say in which country the cost associated with fire sale
prices would be lower. These costs would likely depend on country-level
factors such as a country's regulatory framework governing such
transactions (e.g., how quickly a transaction can get approved), the
degree of competition in the resource extraction industry, availability
of capital (e.g., availability and cost of debt and stock market
valuations), and changes in currency exchange rates. For example, a
recent study documents that companies from countries whose stock market
has increased in value and whose currency has recently appreciated are
more likely to be purchasers of corporate assets.\436\ In a certain
country, a more competitive resource extraction industry is likely to
be associated with lower fire sale discounts.
---------------------------------------------------------------------------
\435\ Corporate control transactions are defined as in footnote
430. Data on the transactions comes from Thomson Financial's Mergers
& Acquisitions.
\436\ See Isil Erel, Rose Liao, and Michael Weisbach 2012.
``Determinants of Cross-Border Mergers and Acquisitions,'' Journal
of Finance 67: 1045-82.
------------------------------------------------------------------------
Number of
transactions
Country (% of all
transactions)
------------------------------------------------------------------------
Angola:
Resource extraction industries........................ 6 (54%)
All other industries.................................. 7 (46%)
Cameroon:
Resource extraction industries........................ 10 (63%)
All other industries.................................. 6 (37%)
China:
Resource extraction industries........................ 885 (6%)
All other industries.................................. 14,304 (94%)
Qatar:
Resource extraction industries........................ 5 (8%)
All other industries.................................. 54 (92%)
------------------------------------------------------------------------
Given the lower liquidity of the market for the real assets of
resource extraction issuers, we believe that the upper limit of the
fire sale discount range would be more appropriate when estimating the
fire sale prices at which affected issuers could dispose of their
assets in countries with disclosure prohibition laws, should such need
arise. If we apply those discount percentages to the market value of
the issuers' assets in these host countries, this would reduce our
estimates of their potential losses. For the U.S.-based issuers, if we
apply the highest discount of 69 percent, the range of losses would be
between $1 million and $6.7 billion, with a median loss of $130.3
million. If the true fire sale discounts in the countries with
disclosure prohibition laws are lower than our highest estimate, the
losses of affected issuers would be lower. In addition to the dollar
costs, the process of disposing of assets could involve substantial
time, which could further increase the total cost of the restructuring.
We acknowledge, however, that the fire sale discount estimates are
based on data from other industries that are very different from the
industries of affected issuers. Thus, our estimates may not accurately
reflect the true fire sale discounts that affected issuers could face.
Alternatively, an issuer could redeploy these assets to other
projects that would generate cash flows. If an issuer could redeploy
these assets relatively quickly and without a significant cost to
projects that generate similar rates of returns as those in the above-
mentioned countries, then the issuer's loss from the presence of such
host country laws would be minimal. The more difficult and costly it is
for an
[[Page 80101]]
issuer to do so, and the more difficult it is to find other projects
with similar rates of return, the larger the issuer's losses would be.
However, we do not have enough data to quantify more precisely the
potential losses of issuers under those various circumstances.
Likewise, if there are multiple potential buyers (e.g., companies not
subject to the proposed rules, the EU Directives, or ESTMA), and if the
issuer could sell those assets to one of such buyers, then the buyer
might pay the fair market value for those assets, resulting in minimal
to no loss for the issuer.
Overall, the results of our analysis are consistent with
commenters' assertions that the presence of host country laws that
prohibit the type of disclosure required under the proposed rules could
be costly, although, as mentioned in the above paragraph, in some
instances there may be mitigating factors that could decrease those
costs. It is also possible that under certain circumstances affected
issuers could lose 100% of their assets in a given country. The size of
the potential loss to issuers would 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 sales of these assets. Finally, as we discussed
above at the beginning of this section, a number of other factors
should substantially mitigate the competitive burdens arising from the
required disclosure, including our intent to consider exemptive relief
on a case-by-case basis.
2. Alternative Reporting
In a change from the 2012 Adopting Release, the proposed rules
would allow resource extraction issuers subject to a foreign
jurisdiction's resource extraction payment disclosure requirements that
we have determined are substantially similar to our requirements to
satisfy their filing obligations by filing the report required by that
foreign jurisdiction with the Commission. This proposed approach would
decrease the compliance costs for issuers that are cross-listed or
incorporated in a foreign jurisdiction and have to satisfy at least one
similar foreign disclosure requirement. Those issuers would save on
compliance costs associated with filing a Form SD pursuant to Section
13(q). We estimated above that approximately 268 issuers would be
subject to other regulatory regimes that may allow them to utilize the
proposed provision.\437\
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\437\ These are issuers that have a business address, are
incorporated, or are listed on markets in the EEA or Canada and that
have to provide similar disclosure to the European or Canadian
authorities.
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As an alternative, we could have decided not to propose such a
provision. Such an alternative would have increased the compliance
costs for issuers that are subject to similar foreign disclosure
requirements. These issuers would have to comply with multiple
disclosure regimes and bear compliance costs for each regime, although
it is possible that the marginal costs for complying with an additional
disclosure regime would not be high given the potential similarities
that may exist between these reporting regimes and the final rules that
we may adopt.
3. Definition of Control
Section 13(q) requires resource extraction issuers to disclose
payments made by a subsidiary or entity under the control of the
issuer. As discussed above in Section II.D above, we are proposing
rules that would define the term ``control'' based on accounting
principles. Alternatively, we could have used a definition based on
Exchange Act Rule 12b-2 as in the 2012 Rules.\438\ We believe that the
approach we are proposing would be less costly for issuers to comply
with because issuers are currently required to apply the definition on
at least an annual basis for financial reporting purposes. Using a
definition based on Rule 12b-2 would require issuers to undertake an
additional process to the one currently required for financial
reporting purposes.\439\ In addition, there are several other benefits
from using the proposed definition based on accounting principles.
There would be audited financial statement disclosure of an issuer's
significant consolidation accounting policies in the footnotes to its
audited financial statements contained in its Exchange Act annual
reports, and an issuer's determination of control under the proposed
rules would be subject to the audit process as well as subject to the
internal accounting controls that issuers are required to have in place
with respect to reporting audited financial statements filed with the
Commission.\440\ All of these benefits may lead to more accurate,
reliable, and consistent reporting of subsidiary payments, therefore,
enhancing the quality of the reported data.
---------------------------------------------------------------------------
\438\ See note 175 above and accompanying text.
\439\ See note 179 above and accompanying text.
\440\ See Section II.D above.
---------------------------------------------------------------------------
Under the definition we adopted in the 2012 Rules, 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. This alternative
would have required issuers to engage in a separate analysis of which
entities are included within the scope of the required disclosures
(apart from the consolidation determinations made for financial
reporting purposes) and could have increased the compliance costs for
issuers compared to the approach we are proposing.
4. Definition of ``Commercial Development of Oil, Natural Gas, or
Minerals''
As in the 2012 Rules, the proposed rules define ``commercial
development of oil, natural gas, or minerals'' to include exploration,
extraction, processing, and export, or the acquisition of a license for
any such activity. As described above, the rules that we are proposing
generally track the language in the statute. We are sensitive to the
fact that a broader definition of ``commercial development of oil,
natural gas, or minerals'' could increase issuers' costs. We are also
sensitive to the fact that expanding the definition in a way that is
broader than other reporting regimes could potentially lead to a
competitive disadvantage for those issuers covered only by our proposed
rules. Further, we recognize that limiting the definition to these
specified activities could potentially negatively affect those using
the payment information if disclosure about payments made for
activities not included in the list of specified activities, such as
refining, smelting, marketing, or stand-alone transportation services
(that is, transportation that is not otherwise related to export),
would be useful to users of the information.
As noted above, to promote the transparency goals of Section 13(q),
the proposed 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
proposed rules, is part of a plan or scheme to evade the disclosure
required under Section 13(q).\441\ 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.
---------------------------------------------------------------------------
\441\ See proposed Rule 13q-1(b).
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In response to commenters' request for clarification of the
activities covered by the proposed rules, we also are providing
guidance about the activities covered by the terms ``extraction,''
``processing,'' and ``export.'' The
[[Page 80102]]
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
lessen the costs associated with the disclosure requirements.
5. Types of Payments
As in the 2012 Rules, the proposed rules would add two categories
of payments to the list of payment types identified in the statute that
must be disclosed: Dividends and payments for infrastructure
improvements. We include these payment types in the proposed rules
because, based on the comments we have received, we believe they are
part of the commonly recognized revenue stream. For example, payments
for infrastructure improvements have been required under the EITI since
2011. Additionally, we note that the EU Directives and ESTMA also
require only these payment types to be disclosed. Thus, including
dividends and payments for infrastructure improvements (e.g., building
a road) in the list of payment types required to be disclosed under the
proposed rules would promote consistency with the EU Directives and
ESTMA and should improve the effectiveness of the disclosure, thereby
furthering international transparency promotion efforts. Including
dividends and payments for infrastructure improvements also could help
alleviate competitiveness concerns by potentially imposing disclosure
requirements on a wider range of issuers.
As discussed earlier, under the proposed rules, resource extraction
issuers would incur costs to provide the payment disclosure for the
payment types identified in the statute. For example, there would be
costs to modify the issuers' core enterprise resource planning systems
and financial reporting systems so that they can capture and report
payment data at the project level, for each type of payment, government
payee, and currency of payment.\442\ The addition of dividends and
payments for infrastructure improvements to the list of payment types
for which disclosure is required may marginally increase some issuers'
costs of complying with the final rules. For example, issuers may need
to add these types of payments to their tracking and reporting systems.
We understand that these types of payments are more typical for mineral
extraction issuers than for oil issuers,\443\ and therefore only a
subset of the issuers subject to the final rules might be affected.
---------------------------------------------------------------------------
\442\ See note 356 and accompanying text.
\443\ 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 proposed 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. We
have not, however, proposed requiring disclosure of those payments
because we do not believe they are part of the commonly recognized
revenue stream for the commercial development of oil, natural gas, or
minerals.\444\ In addition, by not including these types of payments,
the proposed rules avoid potentially imposing additional compliance
costs on issuers. We acknowledge that some issuers might characterize
some of their payments as social or community payments instead of other
types of payment with the intent of avoiding or obfuscating disclosure.
To the extent that such characterization is done for the purpose of
evading the proposed disclosure requirement, it would be a violation of
the anti-evasion provision discussed above.\445\ Alternatively, if such
payment is genuinely made for the benefit of the local community, it
could, in certain circumstances, support the statutory intent of
reducing corruption.
---------------------------------------------------------------------------
\444\ We note that commenters disagreed on whether such payment
types are part of the commonly recognized revenue stream. See 2012
Adopting Release, n.185 and accompanying discussion (citing
commenters suggesting that social or community payments constitute
part of the commonly recognized revenue stream of resource
extraction) and 2012 Adopting Release, n.188 and accompanying
discussion (citing commenters 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). See
also Section II.C.1 above.
\445\ See note 441 above and accompanying text.
---------------------------------------------------------------------------
Under the proposed 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 also should help reduce compliance costs for issuers
without significantly interfering with the goal of achieving increased
payment transparency.
Under the proposed rules, issuers must disclose payments made in-
kind. The EU Directives and ESTMA require disclosure of in-kind
payments. This requirement is also consistent with the EITI and should
help further the goal of supporting international transparency
promotion efforts and enhance the effectiveness of the disclosure. At
the same time, this requirement could impose costs if issuers have not
previously had to value their in-kind payments. To minimize the
potential additional costs, the proposed rules provide issuers with the
flexibility of reporting in-kind payments at cost, or if cost is not
determinable, at fair market value. We believe this approach could
lower the overall compliance costs associated with our decision to
include the disclosure of in-kind payments within the proposed rules.
6. Definition of ``Not De Minimis''
Section 13(q) requires the disclosure of payments that are ``not de
minimis,'' leaving that term undefined. Consistent with the 2012 Rules,
the proposed rules define ``not de minimis'' to mean any payment,
whether made as a single payment or a series of related payments, that
equals or exceeds $100,000, or its equivalent in the issuer's reporting
currency. Although we considered leaving ``not de minimis'' undefined,
we believe 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.\446\ As noted above, because the primary
purpose of Section 13(q) is to further international transparency
efforts for 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, however, that issuers may have difficulty assessing the
significance of particular payments for particular countries or
recipient governments. Therefore, we are proposing a $100,000 threshold
that would provide clear guidance about payments that are ``not de
minimis'' and promote the transparency goals of the statute.
---------------------------------------------------------------------------
\446\ See 2012 Adopting Release, n.223, n.231, and n.233 and
accompanying text.
---------------------------------------------------------------------------
We considered proposing a definition of ``not de minimis'' that was
based on a qualitative principle or a relative quantitative measure
rather than an absolute quantitative standard. We chose the absolute
quantitative approach for several reasons. An absolute quantitative
approach should promote consistency of disclosure and, in addition,
would be easier for issuers to apply than a definition based on either
a qualitative principle or relative quantitative measure.\447\
Moreover, using an absolute dollar amount threshold for disclosure
purposes
[[Page 80103]]
should reduce compliance costs by reducing the work necessary to
determine what payments must be disclosed.
---------------------------------------------------------------------------
\447\ See 2012 Adopting Release, n.252 and accompanying text.
---------------------------------------------------------------------------
In choosing the $100,000 ``de minimis'' threshold, we selected an
amount that we believe strikes an appropriate balance in light of
varied commenters' concerns and the purpose of the statute. Although
commenters suggested various thresholds,\448\ no commenter provided
data to assist us in determining an appropriate threshold amount. In
addition, our proposed threshold is very similar to the payment
thresholds of other resource extraction disclosure laws.\449\ For
issuers (or their subsidiaries) that are already providing payment
information under those resource extraction disclosure laws, our
definition of ``not de minimis'' would likely decrease compliance costs
(compared to other threshold choices) associated with determining which
payments should be reported because these issuers would already have
systems tailored to this threshold. We considered other absolute
amounts but chose $100,000 as the quantitative threshold in the
definition of ``not de minimis.'' We decided not to propose a lower
threshold because we are concerned that such an amount could result in
undue compliance burdens and raise competitive concerns for many
issuers. We also considered defining ``not de minimis'' either in terms
of a materiality standard or by using a larger number, such as
$1,000,000. Both of these might have resulted in lower compliance costs
and might have lessened competitive concerns. In determining not to
propose these options, however, we were mindful that they could leave
important payment streams undisclosed, reducing the potential benefits
to be derived from the proposed rule. In short, we believe the $100,000
threshold strikes an appropriate balance between concerns about the
potential compliance burdens of a lower threshold and the need to
fulfill the statutory directive for resource extraction issuers to
disclose payments that are ``not de minimis.''
---------------------------------------------------------------------------
\448\ See 2012 Adopting Release, n.235 and n.243 and
accompanying text.
\449\ See note 166 above.
---------------------------------------------------------------------------
7. Definition of ``Project''
Section 13(q) requires a resource extraction issuer to disclose
information about the type and total amount of payments made to a
foreign government or the Federal Government for each project relating
to the commercial development of oil, natural gas, or minerals, but it
does not define the term ``project.'' As noted above, in a change from
the 2012 Rules, the proposed rules define ``project'' as operational
activities governed by a single contract license, lease, concession, or
similar legal agreement, which forms the basis for payment liabilities
with a government. The definition is based on the definition in the EU
Directives and the draft ESTMA definition, but allows for greater
flexibility when operational activities governed by multiple legal
agreements may be deemed a project.
Compared to the 2012 Rules, the proposed definition of ``project''
should help reduce costs for issuers listed in both the United States
and the European Union or in Canada by not requiring different
disaggregation of project-related costs due to different definitions of
the term. It also likely would reduce the competitive disadvantage for
issuers that could be required to make more granular disclosure of
information than their competitors under a narrower definition. Our
proposed approach also would provide more flexibility in, and reduce
the burdens associated with, disaggregating payments made for
activities that relate to multiple agreements that are both
operationally and geographically interconnected.
Our proposed approach may, however, increase the compliance costs
for issuers that would be required to implement systems to track
payments at a different level of granularity than what they currently
track. In a similar vein, it may increase the risk of sensitive
contract information being released, thus increasing the likelihood of
competitive harm for some affected issuers. At the same time, the
ability of issuers to define as a ``project'' agreements that do not
have substantially similar terms may reduce the risk of sensitive
information being released.
As an alternative, we could have proposed to leave ``project''
undefined, as in the 2012 Rules. Leaving the term ``project'' undefined
could have provided issuers more flexibility in applying the term to
different business contexts depending on factors such as the particular
industry or business in which the issuer operates or the issuer's size.
Under such an approach, however, resource extraction issuers could have
incurred costs in determining their ``projects.'' Moreover, leaving the
term undefined could result in higher costs for some resource
extraction issuers than others if an issuer's determination of what
constitutes a ``project'' would result in more granular information
being disclosed than another issuer's determination of what constitutes
a ``project.'' In addition, leaving the term ``project'' undefined may
not be as effective in achieving the transparency benefits contemplated
by the statute because resource extraction issuers' determinations of
what constitutes a ``project'' may differ, which could reduce the
comparability of disclosure across issuers.
Finally, we could have adopted the API definition of project, which
would have defined project-level reporting to allow issuers to combine
as one ``project'' all of the similar extraction activities within a
major subnational political jurisdiction. We acknowledge that this
aggregated disclosure could potentially impose fewer costs on resource
extraction issuers--particularly those issuers with many similar
resource extraction activities occurring within a subnational
jurisdiction--as the API suggested definition would not require issuers
to expend the time and resources necessary to achieve the type of
granular reporting that our proposed rules would require.\450\ However,
as discussed above in Section II.E, we believe that such a high-level
definition, as opposed to the proposed definition, would not
appropriately serve the anticorruption and transparency objectives that
Congress intended when it enacted Section 13(q).
---------------------------------------------------------------------------
\450\ While it is possible that industry practice regarding the
scope of resource extraction contracts could change in response to
the proposed rules (e.g., by entering into contracts that cover
subnational political jurisdictions), we do not believe such broad
contracts reflect current industry practice. See also note 204 and
accompanying discussion.
---------------------------------------------------------------------------
8. Annual Report Requirement
Section 13(q) provides that the resource extraction payment
disclosure must be ``include[d] in an annual report.'' The proposed
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. Form SD would be due no later than
150 days after the end of the issuer's most recent fiscal year. This
should lessen the burden of compliance with Section 13(q) and the
related rules because issuers generally would not have to incur the
burden and cost of providing the payment disclosure at the same time
that they must fulfill their disclosure obligations with respect to
Exchange Act annual reports.\451\ An additional benefit is that this
requirement would provide information
[[Page 80104]]
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 any concerns and costs
associated with the disclosure being subject to the officer
certifications required by Exchange Act Rules 13a-14 and 15d-14.
---------------------------------------------------------------------------
\451\ For example, a resource extraction issuer may potentially
be able to save resources to the extent that the timing of its
obligations with respect to its Exchange Act annual report and its
obligations to provide payment disclosure allow for it to allocate
its resources, in particular personnel, more efficiently.
---------------------------------------------------------------------------
Resource extraction issuers would incur costs associated with
preparing and filing each Form SD. We do not believe, however, that the
costs associated with filing each Form SD instead of furnishing the
disclosure in an existing form would be significant. Requiring covered
issuers to file, instead of furnish, the payment information in Form SD
may create an incremental risk of liability in litigation under Section
18 of the Exchange Act. This incremental risk of legal liability could
be a benefit to users of the information to the extent that issuers
would be more attentive to the information they file, thereby
increasing the quality of the reported information. However, we note
that Section 18 does not create strict liability for ``filed''
information.\452\
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\452\ See Exchange Act Section 18 [15 U.S.C. 78r]. A plaintiff
asserting a claim under Section 18 would need to meet the elements
of the statute to establish a claim, including purchasing or selling
a security in reliance on the misstatement and incurring damages
caused by that reliance.
---------------------------------------------------------------------------
Finally, the proposed rules do not require the resource extraction
payment information to be audited or provided on an accrual basis. Not
requiring the payment information to be audited or provided on an
accrual basis may result in lower compliance costs than otherwise would
be the case if resource extraction issuers were required to provide the
information on an accrual basis or audited information.\453\
---------------------------------------------------------------------------
\453\ See 2012 Adopting Release, n.405 and accompanying text.
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9. Exhibit and Interactive Data Requirement
Section 13(q) requires the payment disclosure to be electronically
formatted using an interactive data format. Consistent with the 2012
Rules, the proposed rules would require a resource extraction issuer to
provide the required payment disclosure in an XBRL exhibit to Form SD
that includes all of the electronic tags required by Section 13(q) and
the proposed rules.\454\ We believe that requiring the specified
information to be presented in XBRL format would benefit issuers and
users of the information by promoting consistency and standardization
of the information and increasing the usability of the payment
disclosure. Providing the required disclosure elements in a human-
readable and machine-readable (electronically-tagged) format would
allow users to quickly examine, extract, aggregate, compare, and
analyze the information in a manner that is most useful to them. This
includes searching for specific information within a particular
disclosure as well as performing large-scale statistical analysis using
the disclosures of multiple issuers and across date ranges.
---------------------------------------------------------------------------
\454\ 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 format may
increase compliance costs for some issuers. The electronic formatting
costs would vary depending upon a variety of factors, including the
amount of payment data disclosed and an issuer's prior experience with
XBRL. While most issuers are already familiar with XBRL because they
use it for their annual and quarterly reports filed with the
Commission, issuers that are not already filing reports using XBRL
(i.e., foreign private issuers that report using IFRS) \455\ would
incur some start-up costs associated with that format. We do not
believe that the ongoing costs associated with this data tagging would
be significantly greater than filing the data in XML.\456\
---------------------------------------------------------------------------
\455\ We estimate that 13 of the 471 affected issuers fall into
this category.
\456\ See Section II.G.5 above.
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Consistent with the statute, the proposed rules require a resource
extraction issuer to include an electronic tag that identifies the
currency used to make the payments. Under the proposed rules, if
multiple currencies are used to make payments for a specific project or
to a government, a resource extraction issuer may choose to provide the
amount of payments made for each payment type and the total amount per
project or per government in either U.S. dollars or the issuer's
reporting currency.\457\ We recognize that a resource extraction issuer
could incur costs associated with converting payments made in multiple
currencies to U.S. dollars or its reporting currency. Nevertheless,
given the statute's tagging requirements and requirements for
disclosure of total amounts, we believe reporting in one currency is
necessary.\458\ The proposed rules provide flexibility to issuers in
how to perform the currency conversion, which may result in lower
compliance costs because it enables issuers to choose the option that
works best for them. To the extent issuers choose different options to
perform the conversion, it may result in less comparability of the
payment information and, in turn, could result in costs to users of the
information.
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\457\ See Instruction 2 to Item 2.01 of Form SD.
\458\ See discussion in Section II.G.5 above.
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D. Request for Comments
We request comment on the potential costs and benefits of the
proposed rules and whether the rules, if adopted, would promote
efficiency, competition, and capital formation or have an impact or
burden on competition. In particular, we request comments on the
potential effect on efficiency, competition, and capital formation
should the Commission not adopt certain exceptions or accommodations.
Commenters are requested to provide empirical data, estimation
methodologies, and other factual support for their views, in
particular, on costs and benefits estimates. Our specific questions
follow.
71. We seek information that would help us quantify or otherwise
qualitatively assess the benefits of the proposed rules. Please
provide any studies or other evidence that show a causal link
between transparency efforts, particularly the EITI, EU Directives
or ESTMA, and societal outcomes.
72. Do smaller reporting companies account for a significant portion
of the total payments made to governmental entities for the
extraction of natural resources? Do emerging growth companies
account for a significant portion of such payments? Generally, what
is the distribution of reportable payments across issuers of
different sizes? Are larger issuers more likely to make such
payments as compared to smaller reporting companies or emerging
growth companies?
73. We seek information that would help us quantify compliance costs
(both initial and ongoing) more precisely. In particular, we invite
issuers and other commenters that have had experience with the costs
associated with reporting under the EU Directives to provide us with
information about those costs. What are actual compliance costs for
issuers that have started to comply with regulations transposed
under the EU Directives?
74. What is the breakdown of various compliance costs, such as,
legal fees, direct administrative costs, information technology/
consulting costs, training costs, travel costs, etc.?
75. Is our approach to cost estimates accurate? What is the
proportion of fixed costs in the direct compliance costs structure
of potentially affected resource extraction issuers? Would smaller
resource extraction issuers incur proportionally lower compliance
costs than larger resource extraction issuers? Why or why not? Would
affiliated
[[Page 80105]]
issuers be able to save on fixed costs of developing compliance
systems through sharing such costs? If so, what is the estimate of
such savings?
76. Is our approach to identify small issuers that likely do not
make any payments above the proposed de minimis amount of $100,000
to any government entity accurate? Are annual revenues and net cash
flows from investing activities taken together an appropriate
measure for such purpose?
77. What are the compliance costs of converting a resource
extraction payment report in the format required by EU or Canadian
regulations (e.g., XLS or PDF) to the report format required by the
proposed rules (i.e., XBRL)?
78. What are the costs and benefits arising from confidential
submission of the payment information? What are the costs and
benefits arising from public disclosure of the payment information?
How do the potential costs of public disclosure to issuers compare
to its potential benefits to users of the information?
79. What are the estimated losses of projects (either total loss or
fire sale discount) in the host countries that prohibit payment
disclosure? Is our methodology to estimate such losses accurate?
What industry-specific and country-specific factors affect the
magnitude of losses in these cases and how can we quantify the
impact of such factors? Are there any estimates based on the
experience of issuers subject to EU or other disclosure rules that
operate in such countries?
80. Are there studies on the potential effects of the proposed
rules, the EU or Canadian disclosure rules, or EITI compliance on
efficiency, competition, and capital formation? What are potential
competitive effects of the proposed rules and how might they be
impacted when the regulations promulgated pursuant to the EU
Directives and ESTMA come into full effect? What fraction of
international extractive companies would be affected by at least one
of the U.S., EU, or Canadian rules?
81. What are the benefits and costs of an alternative reporting
option for issuers that are subject to a foreign jurisdiction's
resource extraction payment disclosure requirements that are
determined to be substantially similar to our requirements? How much
would such issuers save in compliance costs if they have the option
to satisfy their filing obligations by filing the report required by
that foreign jurisdiction with the Commission?
82. Are there additional benefits associated with the proposed
rules? For example, would disclosure of payment information required
by the proposed rules be useful to investors in smaller reporting
companies who may not otherwise receive disclosure about country-
specific risk? Why or why not?
IV. Paperwork Reduction Act
A. Background
Certain provisions of the proposed rules contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\459\ The Commission is submitting the
proposal to the Office of Management and Budget (``OMB'') for review in
accordance with the PRA.\460\ An agency may not conduct or sponsor, and
a person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number. The title for
the collection of information is:
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\459\ 44 U.S.C. 3501 et seq.
\460\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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``Form SD'' (OMB Control No. 3235-0697).
Form SD is currently used to file Conflict Minerals Reports
pursuant to Rule 13p-1 of the Exchange Act. We are proposing amendments
to Form SD to accommodate disclosures required by Rule 13q-1, which
would require resource extraction issuers to disclose information about
payments made by the issuer, a subsidiary of the issuer, or an entity
under the control of the issuer to foreign governments or the U.S.
Federal Government for the purpose of the commercial development of
oil, natural gas, or minerals. Form SD would be filed on EDGAR with the
Commission.
The proposed rules and amendment to the form would 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.'' \461\ 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.\462\ We are proposing to require that the mandated
payment information be provided in an XBRL exhibit to Form SD. The
disclosure requirements would apply equally to U.S. issuers and foreign
issuers meeting the definition of ``resource extraction issuer.''
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\461\ 15 U.S.C. 78m(q)(2)(A).
\462\ 15 U.S.C. 78m(q)(2)(C) and (D).
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Compliance with the rules by affected issuers would be mandatory.
Responses to the information collections would not be kept confidential
and there would be no mandatory retention period for the collection of
information.
B. Estimate of Issuers
The number, type, and size of the issuers that would be required to
file the payment information required in Form SD, as proposed to be
amended, is uncertain, but, as discussed in the economic analysis
above, we estimate that the number of potentially affected issuers is
877.\463\ Of these issuers, we have identified 268 that may be subject
to similar resource extraction payment disclosure rules in other
jurisdictions by the time the proposed rules are adopted and 138
smaller issuers that are unlikely to make any payments that would be
subject to the proposed disclosure requirements.\464\ For the issuers
subject to similar disclosure rules in other jurisdictions, the
additional costs to comply with our proposed rules would be much lower
than costs for other issuers.\465\ For the smaller issuers that are
unlikely to be subject to the proposed rules, we believe there would be
no additional costs associated with
[[Page 80106]]
our proposed rules. Accordingly, we estimate that 471 issuers would
bear the full costs of compliance with the proposed rules, with 268
bearing significantly lower costs.
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\463\ See Section III.A above. As discussed above, we derived
877 potentially affected issuers using data from 2014 to estimate
the number of issuers that might make payments covered by the
proposed rules. This number does not reflect the number of issuers
that actually made resource extraction payments to governments.
\464\ See Section III.B.2.b above (describing in more detail how
we identified issuers that may be subject to foreign reporting
requirements and how we used revenues and net cash flows from
investing activities to identify issuers that would be unlikely to
make payments exceeding the proposed de minimis threshold).
\465\ Under the proposed rules, a determination by the
Commission that another jurisdiction's reporting requirements are
substantially similar to ours would lower an issuer's compliance
burden. More significantly, if the issuer is subject to the EU
Directives or ESTMA it would already have gathered, or have systems
in place to gather, resource extraction payment data by the time it
would have to comply with the proposed rules. Although for purposes
of our economic analysis the costs to the 268 issuers that may
already be subject to similar resource extraction payment disclosure
rules would be negligible, we have included them in our estimate of
issuers for PRA purposes because under the proposed rules they would
continue to have an obligation to file a report on Form SD, although
with a significantly lower associated burden. See Section III.B.2.b
above.
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C. Estimate of Issuer Burdens
After considering the comments in connection with the 2010
Proposing Release, international developments, and the differences
between the proposed rules and the 2012 Rules, we have revised our PRA
estimates from those discussed in the 2012 Adopting Release.\466\ We
continue, however, to derive our burden estimates by estimating the
average number of hours it would take an issuer to prepare and file the
required disclosure.\467\ In deriving our estimates, we recognize that
the burdens would likely vary among individual issuers based on a
number of factors, including the size and complexity of their
operations and whether they are subject to similar disclosure
requirements in other jurisdictions.
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\466\ Although the comments we received with respect to our PRA
estimates related to the 2010 Proposing Release, which required the
disclosure in Forms 10-K, 20-F, and 40-F, among other differences,
we have considered these estimates in arriving at our PRA estimate
for Form SD because, although the disclosures would be provided
pursuant to a new rule and on Form SD, the disclosure requirements
themselves are similar. We also believe that this is the more
conservative approach given that changes from the 2010 Proposing
Release and the 2012 Rules should generally reduce the burdens
contemplated by those earlier releases.
\467\ As discussed above, Rule 13q-1 requires resource
extraction issuers to file the payment information required in Form
SD. The collection of information requirements are reflected in the
burden hours estimated for Form SD. Therefore, Rule 13q-1 does not
impose any separate burden.
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When determining the estimates described below, we have assumed
that 75% of the burden of preparation is carried by the issuer
internally and 25% of the burden of preparation is carried by outside
professionals retained by the issuer at an average cost of $400 per
hour.\468\ The portion of the burden carried by outside professionals
is reflected as a cost, while the portion of the burden carried by the
issuer internally is reflected in hours. In connection with the 2010
Proposing Release, we received estimates from some commenters expressed
in burden hours and estimates from other commenters expressed in dollar
costs.\469\ We expect that the rules' effect would be greatest during
the first year of their effectiveness and diminish in subsequent years.
To account for this expected diminishing burden, we believe that a
three-year average of the expected implementation burden during the
first year and the expected ongoing compliance burden during the next
two years is a reasonable estimate.
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\468\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis we estimate that
such costs would be an average of $400 per hour. This is the rate we
typically estimate for outside legal services used in connection
with public company reporting. We note that no commenters provided
us with an alternative rate estimate for these purposes in
connection with the 2010 Proposing Release.
\469\ See 2012 Adopting Release at Section IV.B.
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In connection with the 2010 Proposing Release, some commenters
estimated implementation costs of tens of millions of dollars for large
filers and millions of dollars for smaller filers.\470\ These
commenters did not describe how they defined ``small'' and ``large''
filers. One commenter provided an estimate of $50 million in
implementation costs if the definition of ``project'' is narrow and the
level of disaggregation is high across other reporting parameters,
though it did not provide alternate estimates for different definitions
of ``project'' or different levels of disaggregation.\471\ We note that
the commenter that provided this estimate was among the largest 20 oil
and gas companies in world,\472\ and we believe that the estimate it
provided may be representative of the costs to companies of similar
large size rather than smaller companies.
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\470\ See letters from API 1 and ExxonMobil 1.
\471\ See letter from ExxonMobil 1.
\472\ See letter from API (Oct. 12, 2010) (ranking the 75
largest oil and gas companies by reserves and production).
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Generally, we note that some of the estimates we received may
reflect the burden to a particular commenter, and may not represent the
burden for other resource extraction issuers.\473\ Also, while we
received estimates for smaller companies and an estimate for one of the
largest companies, we did not receive data on companies of varying
sizes in between the two extremes. Finally, commenters' estimates on
the burdens associated with initial implementation and ongoing
compliance varied widely.\474\
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\473\ For example, one commenter's letter indicated that it had
approximately 120 operating entities. See letter from Rio Tinto.
\474\ 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 commenter did not explain how
it defined small and large filers.
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As discussed above, we estimate that 471 issuers would bear the
full costs of compliance and 268 issuers may be subject to similar
resource extraction payment disclosure rules by the time the proposed
rules are adopted, such that the additional costs to comply with our
proposed rules would be much lower than costs for other issuers. We
also estimate that 138 smaller issuers would bear no compliance costs
because it is likely that any payments they make for the purpose of the
commercial development of oil, natural gas, or minerals would be
considered de minimis under the proposed rules. We have used the cost
estimates provided by commenters to estimate the compliance burden for
affected issuers for PRA purposes. To distinguish between the burden
faced by the two groups of affected issuers described above, we have
assumed that the issuers who may already be complying with a similar
foreign disclosure regime would have compliance costs of approximately
five percent of the issuers that bear the full costs of compliance. For
issuers bearing the full costs, we note that Barrick Gold estimated an
initial compliance burden of 1,000 hours (500 hours for initial changes
to internal books and records and 500 hours for initial
compliance).\475\ Although we believe that initial implementation costs
would increase with the size of the issuer, as discussed in our
economic analysis above,\476\ we do not have any estimates on the
fraction of compliance costs that would be fixed versus variable. Also,
since commenters' cost estimates were based on policy choices made in
the 2010 Proposing Release, they might not reflect these commenters'
views on the proposed rules. Unfortunately, we are unable to reliably
quantify the reduction in these cost estimates based on the policy
changes reflected in the proposed rules. Thus, despite Barrick Gold
being a large accelerated filer and commenting on proposed rules that
we believe would have been more onerous than our current proposals, we
use its estimate of 1,000 hours as a conservative estimate pending
additional input from commenters on the proposed rules and other data
we may obtain on compliance burdens in similar, foreign disclosure
regimes.
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\475\ We use Barrick Gold's estimate because it is the only
commenter that provided a number of hours and dollar value estimates
for initial and ongoing compliance costs. Although in the economic
analysis above we used ExxonMobil's dollar value estimate to
calculate an upper bound of compliance costs, we are unable to
calculate the number of burden hours for purposes of the PRA
analysis using ExxonMobil's dollar value inputs.
\476\ See Section III.B above.
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We believe that the burden associated with this collection of
information would be greatest during the implementation period to
account for initial set up costs, but that ongoing compliance costs
would be less because companies would have already made any necessary
modifications to their
[[Page 80107]]
systems to capture and report the information required by the proposed
rules. Two commenters provided estimates of ongoing compliance costs:
Rio Tinto provided an estimate of 5,000-10,000 burden hours for ongoing
compliance,\477\ while Barrick Gold provided an estimate of 500 burden
hours for ongoing compliance. Based on total assets, Rio Tinto is one
of the largest resource extraction issuers. We believe that, because of
Rio Tinto's size, the estimate it provided may be representative of the
burden for resource extraction issuers of a similar size, but may not
be a representative estimate for smaller resource extraction issuers.
Although in terms of total assets Barrick Gold is also among the top
five percent of resource extraction issuers that are Exchange Act
reporting companies, it is closer in size to the average issuer than is
Rio Tinto. As such, we believe that Barrick Gold's estimate is a better
estimate of the ongoing compliance burden hours. We acknowledge,
however, that using Barrick Gold's estimate is a conservative approach.
For example, the average total assets of issuers that we believe would
be bearing the full costs of the rules is only 15.6% of Barrick Gold's
total assets for 2014 ($5.8 billion/$37.4 billion).\478\
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\477\ See letter from Rio Tinto. This commenter estimated 100-
200 hours of work at the head office, an additional 100-200 hours of
work providing support to its business units, and a total of 4,800-
9,600 hours by its business units. We arrived at the estimated range
of 5,000-10,000 hours by adding the estimates provided by this
commenter (100 + 100 + 4,800 = 5,000 and 200 + 200 + 9,600 =
10,000).
\478\ The average estimated resource extraction issuer's total
assets compared to Rio Tinto's total assets ($111.0 billion for
2014) is 5.3%. See note 389 above for the source of this data.
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Thus, using the three-year average of the expected burden during
the first year and the expected ongoing burden during the next two
years, we estimate that the incremental collection of information
burden associated with the proposed rules would be 667 burden hours per
fully affected respondent (1000 + 500 + 500)/3 years). We estimate that
the proposed rules would result in an internal burden of approximately
235,618 hours (471 responses x 667 hours/response x .75) for issuers
bearing the full costs and 6,703 hours (268 responses x 33.35 hours/
response x .75) for issuers that are subject to similar resource
extraction payment disclosure rules in other jurisdictions, amounting
to a total incremental company burden of 242,321 hours (235,618 +
6,703).
Outside professional costs would be $31,415,700 (471 responses x
667 hours/response x .25 x $400) for issuers bearing the full costs and
$893,780 (268 responses x 33.35 hours/response x .25 x $400) for
issuers that are subject to similar resource extraction payment
disclosure rules in other jurisdictions, amounting to total outside
professional costs of $32,309,480 ($31,415,700 + $893,780). Barrick
Gold also indicated that its initial compliance costs would include
$100,000 for IT consulting, training, and travel costs. Again, we
believe this to be a conservative estimate given the size of Barrick
Gold compared to our estimate of the average resource extraction
issuer's size. We do not, however, believe that these initial IT costs
would apply to the issuers that are already subject to similar resource
extraction payment disclosure rules, since those issuers should already
have such IT systems in place to comply with a foreign regime. Thus, we
estimate total IT compliance costs to be $47,100,000 (471 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 for PRA purposes of $79,409,480 ($32,309,480 +
$47,100,000) for all issuers.\479\ The total burden hours and total
professional costs discussed above would be in addition to the existing
estimated hour and cost burdens applicable to Form SD as a result of
compliance with Exchange Act Rule 13p-1.
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\479\ We note that this PRA cost estimate serves a different
purpose than the economic analysis and, accordingly, estimates costs
differently. See note 390 above. One of these differences is that
the economic analysis estimates average total compliance costs for
affected issuers without dividing such costs between internal burden
hours and external cost burdens. See Section III.B above.
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D. Solicitation of Comments
We request comments in order to evaluate: (1) Whether the proposed
collection of information is necessary for the proper performance of
the functions of the agency, including whether the information would
have practical utility; (2) the accuracy of our estimate of the burden
of the proposed collection of information; (3) whether there are ways
to enhance the quality, utility, and clarity of the information to be
collected; (4) whether there are ways to minimize the burden of the
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology; and (5) whether the proposed amendments would
have any effects on any other collections of information not previously
identified in this section.\480\
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\480\ We request comment pursuant to 44 U.S.C. 3506(c)(2)(B).
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Any member of the public may direct to us any comments about the
accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct the comments to the Office of
Management and Budget, Attention: Desk Officer for the Securities and
Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and should send a copy to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090, with reference to File No. S7-25-15.
Requests for materials submitted to OMB by the Commission with regard
to these collections of information should be in writing, refer to File
No. S7-25-15, and be submitted to the Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE., Washington, DC
20549-2736. OMB is required to make a decision concerning the
collection of information between 30 and 60 days after publication of
this release. Consequently, a comment to OMB is best assured of having
its full effect if OMB receives it within 30 days of publication.
V. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\481\ a rule is ``major'' if it has resulted, or is likely
to result in:
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\481\ 5 U.S.C. 801 et seq.
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An annual effect on the U.S. economy of $100 million or
more;
a major increase in costs or prices for consumers or
individual industries; or
significant adverse effects on competition, investment, or
innovation.
We request comment on whether our proposal would be a ``major
rule'' for purposes of the Small Business Regulatory Enforcement
Fairness Act. We solicit comment and empirical data on:
The potential effect on the U.S. economy on an annual
basis;
any potential increase in costs or prices for consumers or
individual industries; and
any potential effect on competition, investment, or
innovation.
VI. Initial Regulatory Flexibility Act Analysis
This Initial Regulatory Flexibility Act Analysis has been prepared
in accordance with 5 U.S.C. 603. It relates to proposed rule and form
amendments to implement Section 13(q) of the Exchange Act, which
concerns certain disclosure obligations of resource
[[Page 80108]]
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.
A. Reasons for, and Objectives of, the Proposed Action
The proposed rule and form amendments are designed to implement the
requirements of Section 13(q), which was added by Section 1504 of the
Dodd-Frank Act. Specifically, the proposed rule and form amendments
would require a resource extraction issuer to disclose in an annual
report certain information relating to any payment made by the issuer,
a subsidiary of the issuer, or an entity under the issuer's control to
a foreign government or the United States Federal Government for the
purpose of the commercial development of oil, natural gas, or minerals.
An issuer would have to include that information in an exhibit to Form
SD. The exhibit would have to be formatted in XBRL.
B. Legal Basis
We are proposing the rule and form amendments pursuant to Sections
3(b), 12, 13, 15, 23(a), and 36 of the Exchange Act.
C. Small Entities Subject to the Proposed Rules
The proposals would 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)
\482\ defines an issuer (other than an investment company) to be a
``small business'' or ``small organization'' for purposes of the
Regulatory Flexibility Act if it had total assets of $5 million or less
on the last day of its most recent fiscal year. The proposals would
affect 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 SICs,\483\ we estimate
that there are approximately 311 companies that would be considered
resource extraction issuers under the proposed rules and that may be
considered small entities.
---------------------------------------------------------------------------
\482\ 17 CFR 240.0-10(a).
\483\ See Section III.B above for a discussion of how we
estimated the number of ``resource extraction issuers'' under the
proposed rules.
---------------------------------------------------------------------------
D. Reporting, Recordkeeping, and Other Compliance Requirements
The proposed rule and form amendments would add to the annual
disclosure requirements of companies meeting the definition of resource
extraction issuer, including small entities, by requiring them to
provide the payment disclosure mandated by Section 13(q) in Form SD.
That information must include:
The type and total amount of payments made for each
project of the issuer relating to the commercial development of oil,
natural gas, or minerals; and
the type and total amount of those payments made to each
government.
The same payment disclosure requirements would apply to U.S. and
foreign resource extraction issuers.
E. Duplicative, Overlapping, or Conflicting Federal Rules
We believe there are no federal rules that duplicate, overlap, or
conflict with the proposed rules.
F. Significant Alternatives
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 the proposals, we considered the following
alternatives:
(1) Establishing different compliance or reporting requirements
which take into account the resources available to smaller entities;
(2) Exempting smaller entities from coverage of the disclosure
requirements, or any part thereof;
(3) The clarification, consolidation, or simplification of
disclosure for small entities; and
(4) Use of performance standards rather than design standards.
Section 13(q) does not contemplate separate disclosure requirements
for small entities that would differ from the proposed reporting
requirements, or exempting them from those requirements. The statute is
designed to enhance the transparency of payments by resource extraction
issuers to governments and providing different disclosure requirements
for small entities or exempting them from the coverage of the
requirements may impede the transparency and comparability of the
disclosure mandated by Section 13(q). We have requested comment as to
whether we should provide an exemption or delayed compliance for
smaller reporting companies.
The proposed rules would require clear disclosure about the
payments made by resource extraction issuers to foreign governments and
the U.S. Federal Government, which may result in increased transparency
about those payments. The required electronic formatting of the exhibit
would simplify the search and retrieval of payment information about
resource extraction issuers, including small entities, for users of the
information.
We have used design rather than performance standards in connection
with the proposed amendments because the statutory language, which
requires electronic tagging of specific items, contemplates specific
disclosure requirements. We further believe that the proposed rules
would be more useful to users of the information if there are specific
disclosure requirements that promote transparent and comparable
disclosure among all resource extraction issuers. Such requirements
should help further the statutory goal of supporting international
transparency promotion efforts.
G. Request for Comment
We encourage the submission of comments with respect to any aspect
of this Initial Regulatory Flexibility Analysis. In particular, we
request comments regarding:
How the proposed rule and form amendments can achieve
their objective while lowering the burden on small entities;
the number of small entity companies that may be affected
by the proposed rule and form amendments;
the existence or nature of the potential impact of the
proposed rule and form amendments on small entity companies discussed
in the analysis; and
how to quantify the impact of the proposed rule and form
amendments.
Respondents are asked to describe the nature of any impact and provide
empirical data supporting the extent of the impact. Such comments will
be considered in the preparation of the Final Regulatory Flexibility
Analysis, if the proposed rules are adopted, and will be placed in the
same public file as comments on the proposed rules themselves.
We are proposing the rule and form amendments contained in this
document under the authority set forth in Sections 3(b), 12, 13, 15,
23(a), and 36 of the Exchange Act.
[[Page 80109]]
List of Subjects in 17 CFR Parts 240 and 249b
Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, we are proposing to amend Title
17, Chapter II of the Code of Federal Regulations as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b&4, 80b-11, 7201 et seq.,
and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350;
and Pub. L. 111-203, 939A, 124 Stat. 1376 (2010), unless otherwise
noted.
* * * * *
0
2. Section 240.13q-1 is revised to read as follows:
Sec. 240.13q-1 Disclosure of payments made by resource extraction
issuers.
(a) A resource extraction issuer must file a report on Form SD (17
CFR 249b.400) within the period specified in that Form disclosing the
information required by the applicable items of Form SD as specified in
that Form.
(b) Disclosure is required under this section in circumstances in
which an activity related to the commercial development of oil, natural
gas, or minerals, or a payment or series of payments made by a resource
extraction issuer to a foreign government or the Federal Government for
the purpose of commercial development of oil, natural gas, or minerals
is not, in form or characterization, within one of the categories of
activities or payments specified in Form SD, but is part of a plan or
scheme to evade the disclosure required under this section.
(c) Definitions. For the purpose of this section the terms
``resource extraction issuer,'' ``commercial development of oil,
natural gas, or minerals,'' ``foreign government,'' and ``payment'' are
defined in Form SD.
PART 249b--FURTHER FORMS, SECURITIES EXCHANGE ACT OF 1934
0
3. The authority citation for part 249b is amended by revising the sub-
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,
Public Law 111-203, 124 Stat. 2213 and 2220.
* * * * *
0
4. Amend Form SD (referenced in Sec. 249b.400) by:
0
a. Adding a check box for Rule 13q-1;
0
b. Revising instruction A. under ``General Instructions'';
0
c. Redesignating instruction B.2. as B.3 and adding new instructions
B.2. and B.4. under the ``General Instructions''; and
0
d. Redesignating Section 2 as Section 3, adding new Section 2, and
revising newly redesignated Section 3 under the ``Information to be
Included in the Report''.
The addition and revision read as follows:
Note: The text of Form SD does not, and this amendment will not,
appear in the Code of Federal Regulations.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM SD
Specialized Disclosure Report
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(Exact name of the registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
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(Commission File Number)
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(I.R.S. Employer Identification No.)
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(Full mailing address of principal executive offices)
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(Name and telephone number, including area code, of the person to
contact in connection with this report.)
Check the appropriate box to indicate the rule pursuant to which this
Form is being filed, and provide the period to which the information in
this Form applies:
___ 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___
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GENERAL INSTRUCTIONS
A. Rule as to Use of Form SD.
This Form shall be used for a report pursuant to Rule 13p-1 (17 CFR
240.13p-1) and Rule 13q-1 (17 CFR 240.13q-1) under the Securities
Exchange Act of 1934 (the ``Exchange Act'').
B. Information to be Reported and Time for Filing of Reports.
1. * * *
2. Form filed under Rule 13q-1. File the information required by
Section 2 of this form on EDGAR no later than 150 days after the end of
the issuer's most recent fiscal year.
3. If the deadline for filing this Form occurs on a Saturday,
Sunday or holiday on which the Commission is not open for business,
then the deadline shall be the next business day.
4. The information and documents filed in this report shall not be
deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, unless the registrant specifically
incorporates it by reference into such filing.
* * * * *
INFORMATION TO BE INCLUDED IN THE REPORT
* * * * *
Section 2--Resource Extraction Issuer Disclosure
Item 2.01 Resource Extraction Issuer Disclosure and Report
(a) Required Disclosure. 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 Federal Government, for the purpose of the commercial
development of oil, natural gas, or minerals. The issuer must provide a
statement in the body of the Form SD that the specified payment
disclosure required by this Form is included in such exhibit. The
resource extraction issuer must include the following information in
the exhibit, which must present the information in the eXtensible
Business Reporting Language (XBRL) electronic format:
(1) The type and total amount of such payments made for each
project of the resource extraction issuer relating to the commercial
development of oil, natural gas, or minerals;
[[Page 80110]]
(2) The type and total amount of such payments for all projects
made to each government;
(3) The total amounts of the payments, by category listed in
paragraph (c)(9)(iii) of this Item;
(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 governments (including any foreign government or the
Federal Government) that received the payments and the country in which
each such government is located;
(8) The project of the resource extraction issuer to which the
payments relate;
(9) The particular resource that is the subject of commercial
development; and
(10) The subnational geographic location of the project.
(b) Alternate Reporting. A resource extraction issuer may satisfy
its disclosure obligations under paragraph (a) of this Item by
including as an exhibit to this Form SD a report complying with the
reporting requirements of any alternative reporting regime that are
deemed by the Commission to be substantially similar to the
requirements of Rule 13q-1 (17 CFR 240.13q-1). The issuer must state in
the body of the Form SD that it is relying on this provision and
identify the alternative reporting regime for which the report was
prepared. The issuer must also specify that the payment disclosure
required by this Form is included in an exhibit to this Form SD and
state where the report was originally filed.
(c) Definitions. For purposes of this item, the following
definitions apply:
(1) Business segment means a business segment consistent with the
reportable segments used by the resource extraction issuer for purposes
of financial reporting.
(2) Commercial development of oil, natural gas, or minerals means
exploration, extraction, processing, and export of oil, natural gas, or
minerals, or the acquisition of a license for any such activity.
(3) Control means that the resource extraction issuer consolidates
the entity or proportionately consolidates an interest in an entity or
operation under the accounting principles applicable to the financial
statements included in the resource extraction issuer's periodic
reports filed pursuant to the Exchange Act (i.e., under generally
accepted accounting principles in the United States (U.S. GAAP) or
International Financial Reporting Standards as issued by the
International Accounting Standards Board (IFRS), but not both). A
foreign private issuer that prepares financial statements according to
a comprehensive set of accounting principles, other than U.S. GAAP or
IFRS, and files with the Commission a reconciliation to U.S. GAAP must
determine control using U.S. GAAP.
(4) Export means the movement of a resource across an international
border from the host country to another country by a company with an
ownership interest in the resource. Cross-border transportation
activities by an issuer that is functioning solely as a service
provider, with no ownership interest in the resource being transported,
would not be considered to be export.
(5) Extraction means the production of oil and natural gas as well
as the extraction of minerals.
(6) Financial period means the fiscal year in which the payment was
made.
(7) Foreign government means a foreign government, a department,
agency, or instrumentality of a foreign government, or a company at
least majority owned by a foreign government. As used in this Item
2.01, foreign government includes a foreign national government as well
as a foreign subnational government, such as the government of a state,
province, county, district, municipality, or territory under a foreign
national government.
(8) Not de minimis means any payment, whether made as a single
payment or a series of related payments, which equals or exceeds
$100,000, or its equivalent in the issuer's reporting currency, during
the fiscal year covered by this Form SD. In the case of any arrangement
providing for periodic payments or installments, a resource extraction
issuer must 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.
(9) Payment means an amount paid that:
(i) Is made to further the commercial development of oil, natural
gas, or minerals;
(ii) Is not de minimis; and
(iii) Is one or more of the following:
(A) Taxes;
(B) Royalties;
(C) Fees;
(D) Production entitlements;
(E) Bonuses;
(F) Dividends; and
(G) Payments for infrastructure improvements.
(10) Project means operational activities that are governed by a
single contract, license, lease, concession, or similar legal
agreement, which form the basis for payment liabilities with a
government. Agreements that are both operationally and geographically
interconnected may be treated by the resource extraction issuer as a
single project.
(11) Resource extraction issuer means an issuer that:
(i) Is required to file an annual report with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or
78o(d)); and
(ii) Engages in the commercial development of oil, natural gas, or
minerals.
(12) Subsidiary means an entity controlled directly or indirectly
through one or more intermediaries.
Instructions to Item 2.01
Disclosure by Subsidiaries and Other Controlled Entities
(1) If a resource extraction issuer is controlled by another
resource extraction issuer that has filed a Form SD disclosing the
information required by Item 2.01 of this Form for the controlled
entity, then such controlled entity shall not be required to file the
disclosure required by this Item 2.01 separately. In such
circumstances, the controlled entity must file a notice on Form SD
indicating that the required disclosure was filed on Form SD by the
controlling entity, identifying the controlling entity and the date it
filed the disclosure. The reporting controlling entity must note that
it is filing the required disclosure for a controlled entity and must
identify the controlled entity on its Form SD filing.
Currency Disclosure and Conversion
(2) 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
[[Page 80111]]
must disclose the method used to calculate the currency conversion.
Subnational Geographic Location Tagging
(3) The ``geographic location of the project'' as used in Item
2.01(a)(10) must be sufficiently detailed to permit a reasonable user
of the information to identify the project's specific, subnational,
geographic location. In identifying the location, resource extraction
issuers may use subnational jurisdiction(s) (e.g., a state, province,
county, district, municipality, territory, etc.) and/or a commonly
recognized, subnational, geographic or geological description (e.g.,
oil field, basin, canyon, delta, desert, mountain, etc.). More than one
descriptive term may be necessary when there are multiple projects in
close proximity to each other or when a project does not reasonably fit
within a commonly recognized, subnational geographic location. In
considering the appropriate level of detail, resource extraction
issuers may need to consider how the relevant contract identifies the
location of the project.
Entity Level Disclosure and Tagging
(4) If a government levies a payment obligation, such as a tax or a
requirement to pay a dividend, at the entity level rather than on a
particular project, a resource extraction issuer may disclose that
payment at the entity level. To the extent that payments, such as
corporate income taxes and dividends, are made for obligations levied
at the entity level, 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.
Payment Disclosure
(5) When a resource extraction issuer proportionately consolidates
an entity or operation under U.S. GAAP or IFRS, as applicable, and must
disclose payments made by such entity or operation pursuant to this
Item, such payments must be disclosed on a proportionate basis and must
describe the proportionate interest.
(6) Although an entity providing only services to a resource
extraction issuer to assist with exploration, extraction, processing or
export would generally not be considered a resource extraction issuer,
where such a service provider makes a payment that falls within the
definition of ``payment'' to a government on behalf of a resource
extraction issuer, the resource extraction issuer must disclose such
payment.
(7) ``Processing,'' as used in this Item 2.01, would include, but
is not limited to, midstream activities such as the processing of gas
to remove liquid hydrocarbons, the removal of impurities from natural
gas prior to its transport through a pipeline, and the upgrading of
bitumen and heavy oil, through the earlier of the point at which oil,
gas, or gas liquids (natural or synthetic) are either sold to an
unrelated third party or delivered to a main pipeline, a common
carrier, or a marine terminal. It would also include the crushing and
processing of raw ore prior to the smelting phase. It would not include
the downstream activities of refining or smelting.
(8) A resource extraction issuer must disclose payments made for
taxes on corporate profits, corporate income, and production.
Disclosure of payments made for taxes levied on consumption, such as
value added taxes, personal income taxes, or sales taxes, is not
required.
(9) Fees include license fees, rental fees, entry fees, and other
considerations for licenses or concessions. Bonuses include signature,
discovery, and production bonuses.
(10) Dividends paid to a government as a common or ordinary
shareholder of the issuer that are paid to the government under the
same terms as other shareholders need not be disclosed. The issuer,
however, must disclose any dividends paid in lieu of production
entitlements or royalties.
(11) If a resource extraction issuer makes an in-kind payment of
the types of payments required to be disclosed, the 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.
Interconnected Agreements
(12) The following is a non-exclusive list of factors to consider
when determining whether agreements are ``operationally and
geographically interconnected'' for purposes of the definition of
``project'': (a) whether the agreements relate to the same resource and
the same or contiguous part of a field, mineral district, or other
geographic area; (b) whether the agreements will be performed by shared
key personnel or with shared equipment; and (c) whether they are part
of the same operating budget.
Section 3--Exhibits
Item 3.01 Exhibits
List below the following exhibits filed as part of this report:
Exhibit 1.01--Conflict Minerals Report as required by Items 1.01
and 1.02 of this Form.
Exhibit 2.01--Resource Extraction Payment Report as required by
Item 2.01 of this Form.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the duly authorized undersigned.
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(Registrant)
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By (Signature and Title)*
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(Date)
*Print name and title of the registrant's signing executive officer
under his or her signature.
* * * * *
* * * * *
By the Commission.
Dated: December 11, 2015.
Brent J. Fields,
Secretary.
[FR Doc. 2015-31702 Filed 12-22-15; 8:45 am]
BILLING CODE P