Disclosure of Payments by Resource Extraction Issuers

Federal RegisterSep 12, 2012

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-67717; File No. S7-42-10]

RIN 3235-AK85

Disclosure of Payments by Resource Extraction Issuers

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

We are adopting new rules and an amendment to a new form pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to disclosure of payments by resource extraction issuers. Section 1504 added Section 13(q) to the Securities Exchange Act of 1934, which requires the Commission to issue rules requiring resource extraction issuers to include in an annual report information relating to any payment made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer, to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals. Section 13(q) requires a resource extraction issuer to provide information about the type and total amount of such payments made for each project related to the commercial development of oil, natural gas, or minerals, and the type and total amount of payments made to each government. In addition, Section 13(q) requires a resource extraction issuer to provide information regarding those payments in an interactive data format.

DATES:

Effective date:

November 13, 2012.

Compliance date:

A resource extraction issuer must comply with the new rules and form for fiscal years ending after September 30, 2013. For the first report filed for fiscal years ending after September 30, 2013, a resource extraction issuer may provide a partial year report if the issuer's fiscal year began before September 30, 2013. The issuer will be required to provide a report for the period beginning October 1, 2013 through the end of its fiscal year. For any fiscal year beginning on or after September 30, 2013, a resource extraction issuer will be required to file a report disclosing payments for the full fiscal year.

FOR FURTHER INFORMATION CONTACT:

Tamara Brightwell, Senior Special Counsel, Division of Corporation Finance, Elliot Staffin, Special Counsel, Office of International Corporate Finance, Division of Corporation Finance, or Eduardo Aleman, Special Counsel, Office of Rulemaking, Division of Corporation Finance, at (202) 551-3290, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-4553.

SUPPLEMENTARY INFORMATION:

We are adopting new Rule 13q-1

and an amendment to new Form SD

under the Securities Exchange Act of 1934 (“Exchange Act”).

17 CFR 240.13q-1.

17 CFR 249.448.

15 U.S.C. 78a

et seq.

Table of Contents

I. Background

II. Final Rules Implementing Section 13(q)

A. Summary of the Final Rules

B. Definition of “Resource Extraction Issuer” and Application of the Disclosure Requirements

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

C. Definition of “Commercial Development of Oil, Natural Gas, or Minerals”

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

D. Definition of “Payment”

1. Types of Payments

2. The “Not De Minimis” Requirement

3. The Requirement To Provide Disclosure for “Each Project”

4. Payments by “a Subsidiary * * * or an Entity Under the Control of * * *”

E. Definition of “foreign government”

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

F. Disclosure Required and Form of Disclosure

1. Annual Report Requirement

2. Exhibits and Interactive Data Format Requirements

3. Treatment for Purposes of Securities Act and Exchange Act

G. Effective Date

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

III. Economic Analysis

A. Introduction

B. Benefits and Costs Resulting From the Mandatory Reporting Requirement

1. Benefits

2. Costs

C. Benefits and Costs Resulting From Commission's Exercise of Discretion

1. Definition of “Commercial Development of Oil, Natural Gas, or Minerals”

2. Types of Payments

3. Definition of “Not De Minimis”

4. Definition of “Project”

5. Annual Report Requirement

6. Exhibit and Interactive Data Requirement

D. Quantified Assessment of Overall Economic Effects

IV. Paperwork Reduction Act

A. Background

B. Summary of the Comment Letters

C. Revisions to PRA Reporting and Cost Burden Estimates

D. Revised PRA Estimate

V. Final Regulatory Flexibility Act Analysis

A. Reasons for, and Objectives of, the Final Rules

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Final Rules

D. Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

VI. Statutory Authority and Text of Final Rule and Form Amendments

I. Background

On December 15, 2010, we proposed rule and form amendments

under the Exchange Act to implement Section 13(q) of the Exchange Act, which was added by Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Act”).

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.”

See

Exchange Act Release No. 63549 (December 15, 2010), 75 FR 80978 (December 23, 2010),

available at

http://www.sec.gov/rules/proposed/2010/34-63549.pdf

(“Proposing Release”).

Public Law 111-203 (July 21, 2010).

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.

Based on the legislative history, we understand that Congress enacted Section 1504 to increase the transparency of payments made by oil, natural gas, and mining companies to governments for the purpose of the commercial development of their oil, natural gas, and minerals. A primary goal of such transparency is to help empower citizens of those resource-rich countries to hold their governments accountable for the wealth generated by those resources.

To accomplish this goal, Congress created a disclosure regime under the Exchange Act that would support the commitment of the U.S. Federal Government to international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals.

See, e.g.,

statement by Senator Richard Lugar, one of the sponsors of Section 1504 (“Adoption of the Cardin-Lugar amendment would bring a major step in favor of increased transparency at home and abroad * * *. More importantly, it would help empower citizens to hold their governments to account for the decisions made by their governments in the management of valuable oil, gas, and mineral resources and revenues * * *. The essential issue at stake is a citizen's right to hold its government to account. Americans would not tolerate the Congress denying them access to revenues our Treasury collects. We cannot force foreign governments to treat their citizens as we would hope, but this amendment would make it much more difficult to hide the truth.”), 156 Cong. Rec. S3816 (May 17, 2010).

See

15 U.S.C. 78m(q)(2)(E).

Section 13(q) provides the following definitions and descriptions of several key terms:

• “resource extraction issuer” means an issuer that is required to file an annual report with the Commission and engages in the commercial development of oil, natural gas, or minerals;

15 U.S.C. 78m(q)(1)(D).

• “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;

15 U.S.C. 78m(q)(1)(A).

• “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;

and

15 U.S.C. 78m(q)(1)(B).

• “payment” means a payment that:

• Is made to further the commercial development of oil, natural gas, or minerals;

• Is not de minimis; and

• Includes taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits, that the Commission, consistent with the guidelines of the Extractive Industries Transparency Initiative (to the extent practicable), determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals.

15 U.S.C. 78m(q)(1)(C).

Section 13(q) specifies that “[t]o the extent practicable, the rules issued under [the section] shall support the commitment of the Federal Government to international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals.”

As noted above, the statute explicitly refers to one international initiative, the Extractive Industries Transparency Initiative (“EITI”),

in the definition of “payment.” Although a separate provision in Section 13(q) regarding international transparency

efforts does not explicitly mention the EITI, the legislative history indicates that the EITI was considered in connection with the new statutory provision.

The United States is one of several countries that supports the EITI.

15 U.S.C. 78m(q)(2)(E).

The EITI is a voluntary coalition of oil, natural gas, and mining companies, foreign governments, investor groups, and other international organizations dedicated to fostering and improving transparency and accountability in countries rich in oil, natural gas, and minerals through the publication and verification of company payments and government revenues from oil, natural gas, and mining.

See Implementing the Extractive Industries Transparency Initiative

(2008) (“

Implementing the EITI”

available at

http://eiti.org/document/implementingtheeiti

. According to the EITI, “[b]y encouraging greater transparency and accountability in countries dependent on the revenues from oil, gas and mining, the potential negative impacts of mismanaged revenues can be mitigated, and these revenues can instead become an important engine for long-term economic growth that contributes to sustainable development and poverty reduction.”

EITI Source Book

(2005), at 4,

available at

http://eiti.org/files/document/sourcebookmarch05.pdf

. Announced by former UK Prime Minister Tony Blair at the World Summit on Sustainable Development in Johannesburg in September 2002, the EITI received the endorsement of the World Bank Group in 2003.

See

History of EITI,

http://www.eiti.org/eiti/history

(last visited August 15, 2012).

Currently 14 countries—Azerbaijan, Central African Republic, Ghana, Kyrgyz Republic, Liberia, Mali, Mauritania, Mongolia, Niger, Nigeria, Norway, Peru, Timor Leste, and Yemen—have achieved “EITI compliant” status by completing a validation process in which company payments are matched with government revenues by an independent auditor.

See

http://eiti.org/countries/compliant

(last visited August 15, 2012). Some 22 other countries are EITI candidates in the process of complying with EITI standards, although one of the countries, Madagascar, recently had its EITI candidate status suspended.

See

http://eiti.org/candidatecountries

(last visited August 15, 2012). Several other countries have indicated their intent to implement the EITI.

See

http://eiti.org/othercountries

. Implementation of the EITI varies across countries—the EITI provides criteria and a framework for implementation, but allows countries to make key decisions on the scope of its program (

e.g.,

degree of aggregation of data, inclusion of subnational or social or community payments).

See Implementing the EITI,

at 23-24.

On September 20, 2011, President Obama declared that the United States will join the global initiative and released a National Action Plan stating that the Administration is committing to implement the EITI.

See

http://www.whitehouse.gov/the-press-office/2011/09/20/opening-remarks-president-obama-open-government-partnership

and

http://www.whitehouse.gov/sites/default/files/us_national_action_plan_final_2.pdf

. The U.S. Department of the Interior (“DOI”) is responsible for implementing the U.S. EITI.

See

“White House Announces Secretary Ken Salazar as Senior Official Responsible for Oversight of Implementation of Extractive Industries Transparency Initiative,” White House Statements and Releases (October 25, 2011),

available at

http://www.whitehouse.gov/the-press-office/2011/10/25/white-house-announces-secretary-ken-salazar-administrations-senior-offic

. After soliciting comment on and evaluating comments regarding the formation of the multi-stakeholder group for the U.S. EITI, the DOI announced that the assessment phase of the U.S. EITI implementation was complete, and the next phase of the U.S. EITI implementation will involve establishing the multi-stakeholder group.

See

“U.S. Department of the Interior Announces Results of USEITI Implementation Assessment,” U.S. Department of the Interior News Release (July 10, 2012),

available at

http://www.doi.gov/EITI/index.cfm

See also

letter from Batirente Inc. and NEI Investments (February 10, 2012) (“Batirente and NEI Investments”) (submitting a copy of a statement by 17 Canadian investment institutions calling on the Canadian government to become an EITI implementing country). One commentator indicated that the final rules should be “aligned and coordinated” with the process being developed by the DOI to fulfill the United States' commitment to implementing the EITI.

See

letter from NMA 3.

See, e.g.,

statement by Senator Lugar (“This domestic action will complement multilateral transparency efforts such as the Extractive Industries Transparency Initiative—the EITI—under which some countries are beginning to require all extractive companies operating in their territories to publicly report their payments.”), 111

Cong. Rec.

S3816 (daily ed. May 17, 2010). Other examples of international transparency efforts include the amendments of the Hong Kong Stock Exchange listing rules for mineral companies and the London Stock Exchange AIM rules for extractive companies.

See

Amendments to the GEM Listing Rules of the Hong Kong Stock Exchange, Chapter 18A.05(6)(c) (effective June 3, 2010),

available at

http://www.hkex.com.hk/eng/rulesreg/listrules/gemrulesup/Documents/gem34_miner.pdf

(requiring a mineral company to include in its listing document, if relevant and material to the company's business operations, information regarding its compliance with host country laws, regulations and permits, and payments made to host country governments in respect of tax, royalties, and other significant payments on a country by country basis) and Note for Mining and Oil & Gas Companies—June 2009,

available at

http://www.londonstockexchange.com/companies-and-advisors/aim/advisers/rules/guidance-note.pdf

(requiring disclosure in the initial listing of “any payments aggregating over £10,000 made to any government or regulatory authority or similar body made by the applicant or on behalf of it, in regards to the acquisition of, or maintenance of its assets.”).

See

the list of EITI supporting countries,

available at

http://eiti.org/supporters/countries

(last visited August 15, 2012).

The Commission's rules under Section 13(q) must require a resource extraction issuer to submit the payment information included in an annual report in an interactive data format

using an interactive data standard established by the Commission.

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.

The section also defines “interactive data standard” as a standardized list of electronic tags that mark information included in the annual report of a resource extraction issuer.

The rules issued pursuant to Section 13(q)

must include electronic tags that identify:

15 U.S.C. 78m(q)(2)(C).

15 U.S.C. 78m(q)(2)(D).

15 U.S.C. 78m(q)(1)(E).

15 U.S.C. 78m(q)(1)(F).

15 U.S.C. 78m(q)(2)(D)(i).

• 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.

Section 13(q) further authorizes the Commission to require electronic tags for other information that it determines is necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. 78m(q)(2)(D)(ii).

Section 13(q) provides that the final rules “shall take effect on the date on which the resource extraction issuer is required to submit an annual report relating to the fiscal year * * * that ends not earlier than 1 year after the date on which the Commission issues final rules[.]”

15 U.S.C. 78m(q)(2)(F).

Finally, Section 13(q) requires, to the extent practicable, the Commission to make publicly available online a compilation of the information required to be submitted by resource extraction issuers under the new rules.

The statute does not define the term compilation.

15 U.S.C. 78m(q)(3).

The Commission received over 150 unique comment letters on the proposal as well as over 149,000 form letters (including a petition with 143,000 signatures).

These letters came from corporations in the resource extraction industries, industry and professional associations, United States and foreign government officials, non-governmental organizations, law firms, pension and other investment funds, academics, investors, a labor union and other employee groups, and other interested parties. Commentators generally supported transparency efforts and offered numerous suggestions for revising certain aspects of the proposal in the final rules.

The letters, including the form letters designated as Type A, Type B, and Type C, are available at

http://www.sec.gov/comments/s7-42-10/s74210.shtml.

In addition, to facilitate public input on the Act, the Commission provided a series of email links, organized by topic, on its Web site at

http://www.sec.gov/spotlight/regreformcomments.shtml.

The public comments we received on Section 1504 of the Act, which were submitted prior to the Proposing Release, are available on our Web site at

http://www.sec.gov/comments/df-title-xv/specialized-disclosures/specialized-disclosures.shtml.

Many commentators provided comments both prior to, and in response to, the proposal. Generally, our references to comment letters refer to the comments submitted in response to the proposal. When we refer to a comment letter submitted prior to the proposal, however, we make that clear in the citation.

We have reviewed and considered all of the comments that we received and the rules we are adopting reflect changes made in response to many of the comments. Generally, as adopted, the final rules track the language in the statute, and except for where the language or approach of Section 13(q) clearly deviates from the EITI, the final rules are consistent with the EITI.

In instances where the language or approach of Section 13(q) clearly deviates from the EITI, the final rules track the statute rather than the EITI because in those instances we believe Congress intended the final rules to go beyond what is required by the EITI. We believe this approach is consistent with Section 13(q) and furthers the statutory goal to support international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals because the EITI is referenced in Section 13(q) and is well-recognized for promoting such transparency.

A country volunteers to become an EITI member. To become an EITI member country, among other things, a country must establish a multi-stakeholder group, including representatives of civil society, industry, and government, to oversee implementation of the EITI. The stakeholder group for a particular country agrees to the terms of that country's EITI plan, including the requirements for what information will be provided by the governments and by the companies operating in that country. Generally, as we understand it, under the EITI, companies and the host country's government submit payment information confidentially to an independent administrator selected by the country's multi-stakeholder group, which is frequently an independent auditor. The auditor reconciles the information provided to it by the government and by the companies and produces a report. The information provided in the reports varies widely among countries. A country must complete an EITI validation process to become a compliant member. The EITI Source Book and Implementing the EITI provide guidance regarding what should be included in a country's EITI plan, and we have looked to those materials and to the reports made by EITI member countries for guidance as to EITI requirements.

See

the EITI's Web site at

http://eiti.org.

See

Exchange Act Sections 13(q)(2)(C)(ii) and 13(q)(2)(E) [15 U.S.C. 78m(q)(2)(C)(ii) and 78m(q)(2)(E)].

II. Final Rules Implementing Section 13(q)

A. Summary of the Final Rules

Consistent with the proposal, we are adopting final rules that define the term “resource extraction issuer” as defined in Section 13(q). As proposed, the final rules will apply to all U.S. companies and foreign companies that are engaged in the commercial development of oil, natural gas, or minerals, and that are required to file annual reports with the Commission, regardless of the size of the company or the extent of business operations constituting commercial development of oil, natural gas, or minerals. Consistent with the proposal, the final rules will apply to an issuer, whether government-owned or not, that

meets the definition of resource extraction issuer.

Consistent with the proposal and in light of the structure, language, and purpose of the statute, the final rules do not provide any exemptions from the disclosure requirements. As such, the final rules do not include an exemption for certain categories of issuers or for resource extraction issuers subject to similar reporting requirements under home country laws, listing rules, or an EITI program. The final rules also do not provide an exemption for situations in which foreign law may prohibit the required disclosure. In addition, the final rules do not provide an exemption for instances when an issuer has a confidentiality provision in an existing or future contract or for commercially sensitive information.

Consistent with Section 13(q) and the proposal, the final rules define “payment” to mean a payment that is made to further the commercial development of oil, natural gas, or minerals, is “not de minimis,” and includes taxes, royalties, fees (including license fees), production entitlements, and bonuses. After considering the comments, under the final rules and in accordance with Section 13(q)(1)(C)(ii), we also are including dividends and payments for infrastructure improvements in the list of payments required to be disclosed. The final rules include instructions to clarify the types of taxes, fees, bonuses, and dividends that are covered. In addition, after considering the comments, we have determined to define the term “not de minimis.” Unlike the proposed rules, which left the term “not de minimis” undefined, the final rules define “not de minimis” to mean any payment, whether a single payment or a series of related payments, that equals or exceeds $100,000 during the most recent fiscal year.

Consistent with Section 13(q) and the proposal, after considering the comments, we have decided to leave the term “project” undefined.

Consistent with the proposal, the final rules require a resource extraction issuer to disclose payments made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer to a foreign government or the U.S. Federal Government for the purpose of commercial development of oil, natural gas, or minerals. A resource extraction issuer will be required to disclose payments made directly, or by any subsidiary, or entity under the control of the resource extraction issuer. Therefore, a resource extraction issuer must disclose payments made by a subsidiary or entity under the control of the resource extraction issuer where the subsidiary or entity is consolidated in the resource extraction issuer's financial statements included in its Exchange Act reports, as well as payments by other entities it controls as determined in accordance with Rule 12b-2. A resource extraction issuer may be required to provide the disclosure for entities in which it provides proportionately consolidated information. A resource extraction issuer will be required to determine whether it has control of an entity for purposes of the final rules based on a consideration of all relevant facts and circumstances.

See

Exchange Act Rule 12b-2 for the definition of “control.”

See also

note 315.

We are adopting the definition of “foreign government” consistent with the definition in Section 13(q), as proposed. A “foreign government” includes a foreign national government as well as a foreign subnational government, such as the government of a state, province, county, district, municipality, or territory under a foreign national government. As proposed, the final rules clarify that “Federal Government” means the United States Federal Government. The final rules do not require disclosure of payments made to subnational governments in the United States. Consistent with the proposal, the final rules clarify that a company owned by a foreign government is a company that is at least majority-owned by a foreign government.

After considering the comments, the final rules we are adopting require resource extraction issuers to provide the required disclosure about payments in a new annual report, rather than in the issuer's existing Exchange Act annual report as proposed. We are adopting amendments to new Form SD to require the disclosure.

Similar to the proposal, the Form SD will require issuers to include a brief statement in the body of the form in an item entitled, “Disclosure of Payments By Resource Extraction Issuers,” directing users to detailed payment information provided in an exhibit to the form. As adopted, in response to comments, the final rules require resource extraction issuers to file Form SD on EDGAR no later than 150 days after the end of the issuer's most recent fiscal year. The final rules will require resource extraction issuers to present the payment information in one exhibit to new Form SD rather than in two exhibits, as was proposed. The required exhibit must provide the information using the XBRL interactive data standard.

Because the XBRL exhibit will be automatically rendered into a readable form available on EDGAR, we are not requiring a separate HTML or ASCII exhibit in addition to the XBRL exhibit. Under the final rules, and as required by the statute, a resource extraction issuer must submit the payment information using electronic tags that identify, for any payments made by a resource extraction issuer to a foreign government or the U.S. Federal Government:

In another release we are issuing today, we are adopting rules to implement the requirements of Section 1502 of the Dodd-Frank Act and requiring issuers subject to those requirements to file the disclosure on Form SD.

See

Conflict Minerals, Release 34-67716 (August 22, 2012) (“Conflict Minerals Adopting Release”). Because of the order of our actions, we are adopting Form SD in that release and we are amending the form in this release, but we intend for the form to be used equally for these two separate disclosure requirements and potentially others that would benefit from placement in a specialized disclosure form.

As proposed, an issuer would have been required to submit two exhibits—one in HTML or ASCII and the other in XBRL. As discussed below, we have decided to require only one exhibit for technical reasons and to reduce the compliance burden of the final rules.

• 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.

See

Item 2.01(a) of Form SD (17 CFR 249.448).

In addition, a resource extraction issuer must provide the type and total amount of payments made for each project and the type and total amount of payments made to each government in interactive data format. Unlike the proposal, in response to comments we received, the final rules require resource extraction issuers to file rather than furnish the payment information.

Under the final rules, a resource extraction issuer will be required to comply with the new rules and form for fiscal years ending after September 30, 2013. For the first report filed for fiscal years ending after September 30, 2013, a resource extraction issuer may provide

a partial year report if the issuer's fiscal year began before September 30, 2013. The issuer will be required to provide a report for the period beginning October 1, 2013 through the end of its fiscal year. For any fiscal year beginning on or after September 30, 2013, a resource extraction issuer will be required to file a report disclosing payments for the full fiscal year.

B. Definition of “Resource Extraction Issuer” and Application of the Disclosure Requirements

1. Proposed Rules

In accord with Section 13(q), the proposed rules would have applied to issuers meeting the definition of “resource extraction issuer” and would have defined the term to mean an issuer that is required to file an annual report with the Commission and that engages in the commercial development of oil, natural gas, or minerals. Consistent with Section 13(q), the proposed rules would not have provided any exemptions from the disclosure requirements for resource extraction issuers. The Proposing Release further clarified that the proposed rules would apply to companies that fall within the definition of resource extraction issuer whether or not they are owned or controlled by governments.

2. Comments on the Proposed Rules

We received a variety of comments regarding the proposed rules and the application of the disclosure requirements. Numerous commentators supported the Commission's proposed definition and application of the disclosure requirements, including that the rules should not provide any exemptions from the disclosure requirements.

Noting an absence of statutory language regarding exemptions, several commentators stated that the legislative intent underlying Section 1504 was to provide the broadest possible coverage of extractive companies so as to create a level playing field.

See

letters from Association of Forest Communities in Guatemala (March 8, 2012) (“Guatemalan Forest Communities”), Batirente (February 28, 2011), BC Investment Management Corporation (March 2, 2011) (“bcIMC”), Bon Secours Health System (March 1, 2011) (“Bon Secours”), California State Teachers' Retirement System (March 1, 2011) (“CalSTRS”), Calvert Investments (March 1, 2011) (“Calvert”), Catholic Relief Services and Committee on International Justice and Peace (February 9, 2011) (“CRS”), Derecho Ambiente y Recursos Naturales DAR (March 23, 2012) (“Derecho”), EarthRights International (December 2, 2010) (pre-proposing letter) (“ERI pre-proposal”), EarthRights International (January 26, 2011), (September 20, 2011), (February 3, 2012), (February 7, 2012) (respectively, “ERI 1,” “ERI 2,” “ERI 3,” and “ERI 4”), Earthworks (March 2, 2011), Extractive Industries Working Group (March 2, 2011) (“EIWG”), Global Financial Integrity (March 1, 2011) (“Global Financial 2”), Global Witness (February 25, 2011) (“Global Witness 1”), Global Witness (February 24, 2012) (with attachments) (“Global Witness 2”), Global Witness (February 24, 2012) (“Global Witness 3”), Greenpeace (March 8, 2012), Grupo FARO (February 13, 2012), Philippe Le Billon (March 2, 2012) (“Le Billon”), Libyan Transparency Association (February 22, 2012) (“Libyan Transparency”), National Civil Society Coalition on Mineral Resource Governance of Senegal (February 14, 2012) (“National Coalition of Senegal”), Newground Social Investment (March 1, 2011) (“Newground”), Nigeria Union of Petroleum and Natural Gas Workers (July 8, 2011) (“NUPENG”), ONE (March 2, 2011), ONE Petition (February 23, 2012), Oxfam America (February 21, 2011) (“Oxfam 1”), Petroleum and Natural Gas Senior Staff Association of Nigeria (June 27, 2011) (“PENGASSAN”), PGGM Investments (March 1, 2011) (“PGGM”), PricewaterhouseCoopers LLP (March 2, 2011) (“PWC”), Publish What You Pay U.S. (November 22, 2010) (pre-proposing letter) (“PWYP pre-proposal”), Publish What You Pay U.S. (February 25, 2011) (“PWYP 1”), Railpen Investments (February 25, 2011), Representative Barney Frank, Representative Jose Serrano, Representative Norman Dicks, Representative Henry Waxman, Representative Maxine Waters, Representative Donald Payne, Representative Nita Lowey, Representative Betty McCollum, Representative Barbara Lee, Representative Jesse Jackson, Jr., Representative Alcee Hastings, Representative Gregory Meeks, Representative Rosa DeLauro, and Representative Marcy Kaptur (February 15, 2012) (“Rep. Frank

et al.”

), Revenue Watch Institute (February 17, 2011) (“RWI 1”), Peter Sanborn (March 12, 2011) (“Sanborn”), Senator Benjamin Cardin, Senator John Kerry, Senator Patrick Leahy, Senator Charles Schumer, and Representative Barney Frank (March 1, 2011) (“Sen. Cardin

et al.

1”), Senator Benjamin Cardin, Senator John Kerry, Senator Patrick Leahy, Senator Carl Levin, and Senator Charles Schumer (January 31, 2012) (“Sen. Cardin

et al.

2”), Senator Carl Levin (February 1, 2011) (“Sen. Levin 1”), Social Investment Forum (March 2, 2011) (“SIF”), George Soros (February 23, 2011) and (February 21, 2012) (“Soros 1” and “Soros 2”, respectively), Syena Capital Management LLC (February 17, 2011) (“Syena”), Ta'ang Students and Youth Organization (“TSYO”), TIAA-CREF (March 2, 2011) (“TIAA”), U.S. Agency for International Development (July 15, 2011) (“USAID”), United Steelworkers (March 29, 2011) (“USW”), WACAM (February 2, 2012), and World Resources Institute (March 1, 2011) (“WRI”), and letters designated as Type A and Type B. Other commentators generally voiced their support for strong rules under Section 1504.

See

letters from Cambodians for Resource Revenue Transparency (February 7, 2012) (“Cambodians”), Conflict Risk Network (February 7, 2012), Bill and Melinda Gates Foundation (February 9, 2012) (“Gates Foundation”), Global Witness 2, Barbara and Richard Hause (February 24, 2012), Network for the Fight Against Hunger in Cameroon (February 20, 2012) (“RELUFA 3”), Oxfam America (March 7, 2012) (“Oxfam 3”), Gradye Parsons (February 15, 2012), Representative Raul M. Grijalva (November 15, 2011), Reverend Jed Koball (February 10, 2012), and letters designated as Type C.

See, e.g.,

letters from Calvert, Global Witness 1, Oxfam 1, PWYP 1, Sen. Cardin

et al.

1, Sen. Levin 1, and WRI.

Most commentators that addressed the issue supported including issuers that are owned or controlled by governments within the definition of resource extraction issuer, as proposed.

Commentators favored such inclusion because it would be consistent with the intent of the statute to hold all resource extraction issuers accountable for payments to governments,

would adhere to EITI's universality principle that payment disclosure in a given country should involve all extractive industry companies operating in that country,

and would avoid anti-competitive effects because many government-owned companies are the largest in the industry.

Another commentator stated that, while it did not believe government-owned entities should be exempt from the payment disclosure rules, it opposed requiring a government-owned entity to disclose payments made to the government that controls it. According to that commentator, such payments are not “made to further commercial development,” but rather are “distributions to the entity's controlling shareholder (or to itself), and requiring them to be disclosed is inappropriate as a matter of comity.”

Another commentator sought an exemption for payments made by a foreign government-owned company to a subsidiary or entity controlled by it.

See

letters from American Petroleum Institute (January 28, 2011) (“API 1”), Chevron Corporation (January 28, 2011) (“Chevron”), Exxon Mobil (January 31, 2011) (“ExxonMobil 1”), Le Billon, PWYP 1, and Royal Dutch Shell plc (January 28, 2011) (“RDS 1”).

See

letter from PWYP 1.

See

letters from API 1 and ExxonMobil 1.

See

letters from Chevron and RDS 1.

See

letter from Cleary Gottlieb Steen & Hamilton (March 2, 2011) (“Cleary”).

See

letter from Statoil ASA (February 22, 2011) (“Statoil”).

Several other commentators supported exemptions for certain categories of issuers or for certain circumstances.

For example, while opposing a general exemption for smaller reporting companies, some commentators supported an exemption for a small entity having $5 million or less in assets on the last day of its most recently completed fiscal year.

Other commentators opposed an exemption for smaller companies because of their belief that those companies generally face greater equity risk from their

operations in host countries than larger issuers.

See, e.g.,

letters from API 1, API (August 11, 2011) (“API 2”) and API (May 18, 2012) (“API 5”), ExxonMobil 1, Cleary, New York State Bar Association, Securities Regulation Committee (March 1, 2011) (“NYSBA Committee”), PetroChina Company Limited (February 28, 2011) (“PetroChina”), Petroleo Brasileiro S.A. (February 21, 2011) (“Petrobras”), Rio Tinto plc (March 2, 2011) (“Rio Tinto”), RDS 1, and Statoil.

See

letters from API 1 and ExxonMobil 1. Those commentators otherwise supported the application of the payment disclosure requirements to all classes of issuers.

See

letters from Global Witness 1, PWYP 1, Sen. Cardin

et al.

1, and Soros 1.

In addition, some commentators supported an exemption for circumstances in which issuers were subject to other resource extraction payment disclosure requirements, such as host country law, stock exchange listing requirements, or an EITI program.

Commentators believed that issuers should be able to satisfy their obligations under Section 13(q) and the related rules by providing the disclosure reported under applicable home country laws, listing rules, or the EITI.

Commentators asserted that this would minimize an issuer's burden of having to comply with multiple transparency standards and avoid potentially confusing duplicative disclosure.

Other commentators, however, opposed providing an exemption for issuers based on other reporting requirements because such an exemption would result in an unlevel playing field and loss of comparability.

Some commentators asserted that because there are not currently any other national extractive disclosure regulatory regimes equivalent to Section 13(q), providing such an exemption would be premature.

In addition, several commentators maintained that Section 13(q) was intended to go beyond the disclosure provided under the EITI.

See, e.g.,

letters from API 1, British Petroleum p.l.c. (February 11, 2011 and July 8, 2011) (respectively “BP 1” and “BP 2”), Cleary, ExxonMobil 1, NYSBA Committee, Petrobras, Rio Tinto, RDS 1, Royal Dutch Shell (July 11, 2011) (“RDS 3”), Statoil, and Vale S.A. (March 2, 2011) (“Vale”). In addition, two commentators requested that the Commission align the rules with the reporting requirements to be adopted by the DOI for the U.S. EITI.

See

letters from NMA (June 15, 2012) (“NMA 3”) and Northwest Mining Association (June 29, 2012) (“NWMA”).

See, e.g.,

letters from API 1, ExxonMobil 1, and RDS 1 (suggesting such an approach if home country requirements are at least as rigorous as Section 13(q)); AngloGold Ashanti (January 31, 2011) (“AngloGold”), BHP Billiton Limited (July 28, 2011) (“BHP Billiton”), and Vale (suggesting such an approach if disclosure is made based on EITI principles); BP 2 and RDS 3 (supporting a global common standard for transparency disclosure and, alternatively, suggesting such an approach if disclosure is made in a broadly similar manner based on EITI principles); Cleary, NYSBA Committee, Petrobras, Rio Tinto, and Statoil (suggesting such an approach if disclosure is made pursuant to home country requirements regardless of whether those requirements follow EITI principles); and Cleary, NYSBA Committee, and Statoil (suggesting alternatively such an approach if disclosure is made based on EITI principles if the company is a participant in an EITI program).

See, e.g.,

letters from Cleary, Rio Tinto, and Statoil.

See, e.g.,

letters from ERI 1, Global Witness 1, PWYP 1, Rep. Frank

et al.,

Sen. Cardin

et al.

1, and Sen. Levin 1.

See, e.g.,

letter from PWYP 1. In this regard, after noting that the European Commission (“EC”) is developing legislative proposals for extractive industry reporting rules in the European Union (“EU”), one commentator stated that “it is critical that country-by-country and project-by-project disclosure regulations are adopted across other major markets to ensure a level playing field and consistent reporting across countries.” Letter from Publish What You Pay U.K. (April 28, 2011) (“PWYP U.K.”). The EC subsequently published proposals for extractive industry payment disclosure requirements.

See

discussion in note 82. After the EC published the proposals, PWYP urged the Commission to take the initiative and promptly adopt final rules so that the EC can harmonize its extractive disclosure requirements with the Section 13(q) rules.

See

letter from Publish What You Pay (December 19, 2011) (“PWYP 2”). The EC proposals are currently pending.

See

letters from Global Witness 1, PWYP 1, and Sen. Benjamin Cardin (December 1, 2010) (pre-proposal letter) (“Cardin pre-proposal”).

Many commentators supported an exemption from the disclosure requirements when the required payment disclosure is prohibited under the host country's laws.

Some commentators stated that the laws of China, Cameroon, Qatar, and Angola would prohibit disclosure required under Section 13(q) and expressed concern that other countries would enact similar laws.

Commentators stated that without an appropriate exemption, Section 13(q) would become a “business prohibition” statute that would force issuers to choose between leaving their operations in certain countries or breaching local law and incurring penalties in order to comply with the statute's requirements.

Either outcome, according to commentators, would adversely affect investors, efficiency, competition, and capital formation.

Some commentators further suggested that failure to adopt such an exemption could encourage foreign issuers to deregister from the U.S. market.

Other commentators maintained that comity concerns must be considered when the Section 13(q) disclosure requirements conflict with foreign law.

One commentator suggested that an exemption would be consistent with Executive Order 13609, which directs federal agencies to take certain steps to “reduce, eliminate, or prevent unnecessary differences in [international] regulatory requirements.”

See

letters from API 1, API 2, API 5, AngloGold Ashanti (January 31, 2011) (“AngloGold”), Spencer Bachus, Chairman of the U.S. House of Representatives Committee on Financial Services, and Gary Miller, Chairman of the U.S. House of Representatives Subcommittee on International Monetary Policy, Committee on Financial Services (March 4, 2011) (“Chairman Bachus and Chairman Miller”), Barrick Gold Corporation (February 28, 2011) (“Barrick Gold”), BP 1, Chamber of Commerce Institute for 21st Century Energy (March 2, 2011) (“Chamber Energy Institute”), Chevron, Cleary, ExxonMobil 1, ExxonMobil (March 15, 2011) (“ExxonMobil 2”), International Association of Oil and Gas Producers (January 27, 2011) (“IAOGP”), NMA 2, NYSBA Committee, Nexen Inc. (March 2, 2011) (“Nexen”), PetroChina, Petrobras, PWC, Rio Tinto, RDS 1, Royal Dutch Shell (May 17, 2011) (“RDS 2”), Royal Dutch Shell (August 1, 2011) (“RDS 4”), Senator Lisa Murkowski and Senator John Cornyn (February 28, 2012) (“Sen. Murkowski and Sen. Cornyn”), Split Rock International, Inc. (March 1, 2011) (“Split Rock”), Statoil, Talisman Energy Inc. (“Talisman”) (June 23, 2011), and Vale.

See also

letter from Cravath, Swaine & Moore LLP, Cleary Gottlieb Steen & Hamilton LLP, Davis Polk & Wardwell LLP, Shearman & Sterling LLP, Simpson Thacher & Bartlett LLP, Skadden, Arps, Slate, Meagher & Flom LLP, Sullivan & Cromwell LLP, and Wilmer Cutler Pickering Hale and Dorr LLP (November 5, 2010) (pre-proposal letter) (“Cravath

et al.

pre-proposal”).

See

letters from API 1 and ExxonMobil 1.

See also

letter from RDS 1 (mentioning China, Cameroon, and Qatar).

See

letters from Barrick Gold, Cleary, NYSBA Committee, Rio Tinto, and Statoil;

see also

letter from API 5.

See, e.g.,

letters from API 1, ExxonMobil 1, and RDS 1;

see also

letter from API 5. Several commentators noted that the Commission has a statutory duty to consider efficiency, competition, and capital formation when adopting rules.

See

letter from American Petroleum Institute (January 19, 2012) (“API 3”), Cravath

et al.

pre-proposal, Senator Mary L. Landrieu (March 6, 2012), and Sen. Murkowski and Sen. Cornyn.

See

letters from Cleary, Royal Dutch Shell (October 25, 2010) (pre-proposal letter) (“RDS pre-proposal”), Split Rock, and Statoil.

See also

letter from Branden Carl Berns (December 7, 2011) (“Berns”) (maintaining that some foreign issuers subject to Section 13(q) with modest capitalizations on U.S. exchanges might choose to delist in response to competitive advantages enjoyed by issuers not subject to Section 13(q)).

See

letters from API 5 and NMA 2.

See

letter from API 5. We note that the responsibilities of federal agencies under Executive Order 13609 are to be carried out “[t]o the extent permitted by law” and that foreign regulatory approaches are to be considered “to the extent feasible, appropriate, and consistent with law.”

See

Proclamation No. 13609, 77 FR 26413 (May 4, 2012).

Other commentators opposed an exemption for host country laws prohibiting disclosure of payment information because they believed it would undermine the purpose of Section 13(q) and create an incentive for foreign countries that want to prevent transparency to pass such laws, thereby creating a loophole for companies to avoid disclosure.

Commentators also disputed the assertion that there are foreign laws that specifically prohibit disclosure of payment information.

Those commentators noted that most confidentiality laws in the extractive industry sector relate to the

confidentiality of geological and other technical data, and in any event, contain specific provisions that allow for disclosures to stock exchanges.

See, e.g.,

letters from Cambodians, EG Justice (February 7, 2012) (“EG Justice 2”), Global Witness 1, Grupo Faro, Human Rights Foundation of Monland (March 8, 2011 and July 15, 2011) (respectively, “HURFOM 1” and “HURFOM 2”), National Coalition of Senegal, PWYP 1, Rep. Frank

et al.,

Sen. Cardin

et al.

1, Sen. Cardin

et al.

2, Sen. Levin 1, Soros 2, U.S. Agency for International Development (July 15, 2011) (“USAID”), and WACAM.

See, e.g.,

letters from ERI 3, Global Witness 1, PWYP 1, Publish What You Pay (December 20, 2011) (“PWYP 3”), and Rep. Frank

et al.

See

letters from Global Witness 1, Susan Maples, J.D., Post-Doctoral Research Fellow, Columbia University School of Law (March 2, 2011) (“Maples”), Network for the Fight Against Hunger in Cameroon (March 14, 2011 and July 11, 2011) (respectively, “RELUFA 1” and “RELUFA 2”), and PWYP 1.

Many commentators also sought an exemption from the disclosure requirements for payments made under existing contracts that contain confidentiality clauses prohibiting such disclosure.

According to commentators, while some contracts may permit the disclosure of information to comply with an issuer's home country laws, regulations, or stock exchange rules, those contractual provisions only allow the contracting party, not its parent or affiliate companies, to make the disclosure.

Some commentators also sought an exemption from the requirements for payments made under future contracts containing confidentiality clauses.

See

letters from API 1, AngloGold, Barrick Gold, Chairman Bachus and Chairman Miller, BP 1, Chamber Energy Institute, Chevron, Cleary, ExxonMobil 1, IAOGP, NMA 2, NYSBA Committee, Nexen, PetroChina, Petrobras, PWC, Rio Tinto, RDS 1, Split Rock, Statoil, and Vale.

See

letters from API 1 and ExxonMobil 1.

See

letters from AngloGold and NMA 2. AngloGold suggested conditioning the exemption on an issuer having made a good faith determination that it would not have been able to enter into the contract but for agreeing to a confidentiality provision.

Other commentators opposed an exemption based on confidentiality clauses in contracts on the grounds that such an exemption was not necessary.

Commentators maintained that most contracts include an explicit exception for information that must be disclosed by law, and, in cases where such language is not explicit, it generally would be read into any such contract under judicial or arbitral review.

Commentators further stated that an exemption based on contract confidentiality would undermine Section 13(q) by creating incentives for issuers to craft such contractual provisions.

See

letters from Global Witness 1, Maples, Oxfam (March 20, 2012) (“Oxfam 3”), and PWYP 1.

See, e.g.,

letters from Oxfam 3 and PWYP 1.

See also

letter from SIF citing the “official Production Sharing Contract of the government of Equatorial Guinea” and noting that it explicitly states that companies are permitted to share all information relating to the Contract or Petroleum Operations in the following instances: “To the extent that such data and information is required to be furnished in compliance with any applicable laws or regulation” (Article 20.1.1c) and “[i]n conformity with the requirements of any stock exchange having jurisdiction over a Party[.]” (Article 20.1.1d)).

See, e.g.,

letters from Global Witness 1 and Oxfam 1.

Several commentators supported an exemption for situations when, regardless of the existence of a contractual confidentiality clause, such disclosure would jeopardize commercially or competitively sensitive information.

Other commentators expressed doubt that disclosure of payment information would create competitive disadvantages because much of the information is already available from third-party service providers or through the large number of joint ventures between competitors in the extractive industries.

Commentators also expressed concern that providing an exemption for commercially or competitively sensitive information would frustrate Congress' intent to achieve payment transparency and accountability.

See

letters from American Exploration and Production Council (January 31, 2011) (“AXPC”), API 1, Chamber Energy Institute, Chevron, ExxonMobil 1, IAOGP, Local Authority Pension Fund Forum (January 31, 2011) (“LAPFF”), NMA 2, Rio Tinto, RDS 1, and United States Council for International Business (February 4, 2011) (“USCIB”).

See

letters from PWYP 1 and RWI 1;

see also

letter from Global Witness 1 (noting a study finding that the majority of disclosures that would be required pursuant to Section 13(q) would already be known to actors within the industry).

See, e.g.,

letter from Global Witness 1. Another commentator stated that “to the extent that Section 13(q)'s reporting obligations result in some competitive disadvantage to regulated issuers, Congress already accepted this risk when it determined that pursuing the goals of promoting transparency and good governance was of paramount importance—even at the cost of an incidental burden on issuers * * * As with the Foreign Corrupt Practices Act, Congress made the affirmative choice to set a higher standard for global corporate practice. Other countries have already started to follow Congress' lead in this area * * * Strong U.S. leadership with respect to transparency in the extractive industries will make it easier for foreign governments to adopt similar reporting requirements, which in turn will serve to level the playing field. Letter from Oxfam 1.

Some commentators believed that the disclosure of detailed payment information would jeopardize the safety and security of a resource extraction issuer's operations or employees and requested an exemption in such circumstances.

Other commentators believed that detailed payment disclosure was critical for workers and their communities to achieve benefits from investment transparency, including a decrease in unrest and conflict and increased stability and safety.

See

letters from API 1, Spencer Bachus, Chairman of the U.S. House of Representatives Committee on Financial Services (August 21, 2012) (“Chairman Bachus”), Chevron, ExxonMobil 1, NMA 2, Nexen, PetroChina, and RDS 1.

See

letters from NUPENG, PENGASSAN, PWYP 1, and USW.

Some commentators requested that the Commission extend the disclosure requirements to foreign private issuers that are exempt from Exchange Act reporting obligations but publish their annual reports and other material home country documents electronically in English pursuant to Exchange Act Rule 12g3-2(b).

Those commentators asserted that requiring such issuers to comply with the disclosure requirements would help ameliorate anti-competitive concerns. Other commentators, however, opposed extending the disclosure required under Section 13(q) to companies that are exempt from Exchange Act registration and reporting because it would discourage use of the Rule 12g3-2(b) mechanism

and because such an extension would be inconsistent with the premise of Rule 12g3-2(b).

See

letters from API 1, Calvert, ExxonMobil 1, Global Witness 1, RWI 1, and RDS 1.

See

letter from NYSBA Committee.

See

letter from NMA 2 and NYSBA Committee.

3. Final Rules

Consistent with the proposal, we are adopting final rules that define the term “resource extraction issuer” as it is defined in Section 13(q). The final rules will apply to all U.S. companies and foreign companies that are engaged in the commercial development of oil, natural gas, or minerals and that are required to file annual reports with the Commission, regardless of the size of the company or the extent of business operations constituting commercial development of oil, natural gas, or minerals.

Consistent with the proposal, the final rules will apply to a company, whether government-owned or not, that meets the definition of resource extraction issuer.

Any failure to include government-owned companies within the scope of the

disclosure rules could raise competitiveness concerns.

See

new Exchange Act Rule 13q-1.

As discussed below, a resource extraction issuer, including a government-owned resource extraction issuer, will be required to provide the payment disclosure if the other requirements of the rule are met. Contrary to some commentators' suggestions, we are not providing a carve-out from the rules for payments made by a government-owned resource extraction issuer to its controlling government because we believe it would be inconsistent with the purpose of the statute. We note a government-owned resource extraction issuer would only disclose payments made to the government that controls it if those payments were made for the purpose of commercial development of oil, natural gas, or minerals and the payments are within the categories of payments that would be required to be disclosed under the rules.

See

note 38 and accompanying text.

Although some commentators urged us to provide exemptions for certain categories of issuers,

in light of the statutory purpose of Section 13(q),

we have decided not to adopt exemptions from the disclosure requirement for any category of resource extraction issuers, including smaller issuers and foreign private issuers. We believe the transparency objectives of Section 13(q) are best served by requiring disclosure from all resource extraction issuers. In addition, we agree with commentators that providing an exemption for smaller reporting companies or foreign private issuers could contribute to an unlevel playing field and raise competitiveness concerns for larger companies and domestic companies.

We also note that some commentators opposed an exemption for smaller companies because of their belief that those companies generally face greater equity risk from their operations in host countries than larger issuers.

See

note 41 and accompanying text.

See

note 7 and accompanying text.

See

notes 33 and 34 and accompanying text.

See

letters from Global Witness 1, PWYP 1, Sen. Cardin

et al.

1, and Soros 1.

The final rules also do not permit resource extraction issuers to satisfy the disclosure requirements adopted under Section 13(q) by providing disclosures required under other extractive transparency reporting requirements, such as under home country laws, listing rules, or an EITI program. Section 13(q) does not provide such an accommodation and, as noted by some commentators, in some respects the statute extends beyond the disclosure required under other transparency initiatives.

In addition, we note that transparency initiatives for resource extraction payment disclosure are continuing to develop.

Therefore, we believe it would be premature to permit issuers to satisfy their disclosure obligation by complying with other extractive transparency reporting regimes or by providing the disclosure required by those regimes in lieu of the disclosure required by the rules we are adopting under Section 13(q).

See

note 49 and accompanying text.

One recent development is the European Commission's issuance in October 2011 of proposed directives that would require companies listed on EU stock exchanges and large private companies based in EU member states to disclose their payments to governments for oil, gas, minerals, and timber.

See

the European Commission's press release concerning the proposal, which is available at:

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/1238&format=HTML&aged=0&language=EN&guiLanguage=en

. The EU proposal differs from the final rules we are adopting in several respects. For example, the EU proposal would apply to large, private EU-based companies as well as EU-listed companies engaged in oil, natural gas, minerals, and timber, whereas the final rules apply only to Exchange Act reporting companies engaged in oil, natural gas, and mining. The EU proposal would require disclosure of payments that are material to the recipient government, whereas the final rules require disclosure of payments that are not de minimis. Further, the EU proposal would apply to exploration, discovery, development, and extraction activities, whereas the final rules apply to exploration, extraction, processing, and export activities. In addition, while both the EU proposal and final rules require payment disclosure per project and government, the EU proposal would base project reporting on a company's current reporting structure whereas, as discussed below, the final rules leave the term “project” undefined.

See also

letter from PWYP 2. Other jurisdictions have introduced, but have not adopted, transparency initiatives.

See

letter from ERI 4 and note 14 and accompanying text.

In this regard, we are not persuaded by comments suggesting that we should align our rules with any reporting requirements that may be adopted by the DOI as part of U.S. EITI. DOI is continuing its efforts to develop a U.S. EITI program and is currently working to form the stakeholder group. In addition, the scope of EITI programs generally differs from the scope of the requirements of Section 13(q). An EITI program adopted by a particular country generally requires disclosure of payments to that country's governments by companies operating in that country, but does not require disclosure of payments made by those companies to foreign governments. The disclosure requirements are developed country by country. In contrast, Section 13(q) requires disclosure of payments to the federal and foreign governments by resource extraction issuers. As noted elsewhere in this release, the requirements of the statute differ from the EITI in a number of respects.

Consistent with Section 13(q) and the proposed rules, we also are not providing an exemption for any situations in which foreign law may prohibit the required disclosure. Although some commentators asserted that certain foreign laws currently in place would prohibit the disclosure required under Section 13(q), other commentators disagreed and asserted that currently no foreign law prohibits the disclosure.

Further, as noted above, some commentators believed that we should adopt final rules providing an exemption from the disclosure requirements where foreign laws prohibit the required disclosure, including laws that may be adopted in the future,

while others believed that providing such an exemption would be inconsistent with the statute and would encourage countries to adopt laws specifically prohibiting the required disclosure.

While we understand commentators' concerns regarding the situation an issuer may face if a country in which it does business or would like to do business prohibits the disclosure required under Section 13(q),

the final rules we are adopting do not include an exemption for situations in which foreign law prohibits the disclosure. We believe that adopting such an exemption would be inconsistent with the structure and language of Section 13(q)

and, as some commentators have noted,

could undermine the statute by encouraging

countries to adopt laws, or interpret existing laws, specifically prohibiting the disclosure required under the final rules.

Compare

letters from API 1, Barrick Gold, Cleary, ExxonMobil 1, NMA 2, NYSBA Committee, Rio Tinto, RDS 1, and Statoil with letters from EarthRights International (February 3, 2012) (“ERI 3”), Global Witness, PWYP, Publish What You Pay (December 20, 2011) (“PWYP 2”), Maples, and Rep. Frank

et al.

Several of the comment letters from issuers and industry associations assert that existing laws in Angola, Cameroon, China, and Qatar prohibit, or in some situations may prohibit, disclosure of the type required by Section 13(q). One commentator submitted translations of Despacho 385/06, issued by the Minister of the Angola Ministry of Petroleum, as amended by Despacho 409/06 (the “

Angola Order

”) and a letter dated December 23, 2009, from the Deputy Premier, Minister of Energy & Industry, of the State of Qatar (the “

Qatar Directive

”).

See

letter from ExxonMobil 2. Another commentator submitted a translation of certain sections of Decree No. 2000/465 relating to the Cameroon Petroleum Code, a copy of a legal opinion from Cameroon counsel, and a copy of a legal opinion from Chinese counsel.

See

letter from RDS 1. We are not aware of any other examples submitted on the public record of foreign laws purported to prohibit disclosure of payments by resource extraction issuers. Other commentators have submitted contrary data, arguing that the laws of Angola, Cameroon, China, and Qatar do not prohibit a resource extraction issuer from complying with Section 13(q) and the final rules, and providing examples of companies that have disclosed payment information relating to resource development activities in Angola, Cameroon, and China.

See

letter from ERI 3. One commentator submitted a legal opinion stating that “[n]othing in Cameroonian law prevents oil companies from publishing data on revenues they pay to the state derived from oil contracts signed with the government.”

See, e.g.,

API 1, ExxonMobil 1, and RDS 1.

See, e.g.,

letters from Cambodians, EG Justice (February 7, 2012) (“EG Justice 2”), Global Witness 1, Grupo Faro, HURFOM 1 and HURFOM 2, National Coalition of Senegal, PWYP, Rep. Frank

et al.,

Sen. Cardin

et al.,

Sen. Cardin

et al.

2, Sen. Levin 1, Soros 2, US Agency for International Development (July 15, 2011) (“USAID”), and WACAM.

See, e.g.,

API 1, ExxonMobil 1, and RDS 1.

As noted by some commentators, Section 23(a)(2) requires us, when adopting rules, to consider the impact any new rule would have on competition.

See, e.g.,

letters from API 1, API 3, Chairman Bachus, Cravath et al pre-proposal, and ExxonMobil 1. Specifically, Section 23(a)(2) requires us “to consider * * * the impact any such rule or regulation would have on competition” in making rules pursuant to the Exchange Act. Further, the section states that the Commission “shall not adopt any such rule * * * which would impose a burden on competition not necessary or appropriate in furtherance of [the Exchange Act].” As discussed further below, we recognize the final rules may impose a burden on competition; however, in light of the language and purpose of Section 13(q), which is now part of the Exchange Act, we believe the rules we are adopting pursuant to the provision and any burden on competition that may result are necessary in furtherance of the purpose of the Exchange Act, including Section 13(q) of the Exchange Act.

See, e.g.,

letters from Cambodians, EG Justice (February 7, 2012) (“EG Justice 2”), Global Witness 1, Grupo Faro, HURFOM 1 and HURFOM 2, National Coalition of Senegal, PWYP, Rep. Frank

et al.,

Sen. Cardin

et al.,

Sen. Cardin

et al.

2, Sen. Levin 1, Soros 2, USAID, and WACAM.

Consistent with Section 13(q) and the proposed rules, the final rules do not provide an exemption for instances when an issuer has a confidentiality provision in a relevant contract, as requested by some commentators.

We understand that contracts typically allow for disclosure to be made when required by law for reporting purposes.

Although some commentators maintained that those types of contractual provisions only allow the contracting party, not its parent or affiliate companies, to make the disclosure,

the final rules we are adopting do not include an exemption for confidentiality provisions in contracts because we believe this issue can be more appropriately addressed through the contract negotiation process.

As noted by some commentators, a different approach might encourage a change in practice or an increase in the use of confidentiality provisions to circumvent the disclosure required by the final rules.

In addition, including an exemption from the disclosure requirements for payments made under existing contracts that contain confidentiality clauses prohibiting such disclosure, as suggested by some commentators,

would frustrate the purpose of Section 13(q).

See, e.g.,

letters from API 1, Chevron, Cleary, ExxonMobil 1, NMA 2, and RDS 1.

See

letters from Global Witness 1, Maples, and PWYP 1.

See

letters from API 1 and ExxonMobil 1.

See

letter from Maples.

See

letters from Global Witness and Oxfam.

See

note 60 and accompanying text.

Although some commentators sought an exemption for commercially or competitively sensitive information, regardless of the existence of a confidentiality provision in a contract,

the final rules do not provide such an exemption. We note that commentators disagreed on the need for an exemption for commercially or competitively sensitive information.

While we understand commentators' concerns about potentially being required to provide commercially or competitively sensitive information,

we also are cognizant of other commentators' concerns that such an exemption would frustrate the purpose of Section 13(q) to promote international transparency efforts.

We note that in situations involving more than one payment, the information will be aggregated by payment type, government, and/or project, and therefore may limit the ability of competitors to use the information to their advantage.

See

note 66 and accompanying text.

See

notes 66 and 67 and accompanying text.

See

note 66 and accompanying text.

See

note 68 and accompanying text.

We note that some commentators sought an exemption for circumstances in which a company believes that disclosure might jeopardize the safety and security of its employees and operations,

100

while other commentators opposed such an exemption and noted their belief that increased transparency would instead increase safety for employees.

101

We understand issuers' concerns about the safety of their employees and operations; however, in light of commentators' disagreement on this issue, including the belief by some commentators that disclosure will improve employee safety, and the fact that the statute seeks to promote international transparency efforts, we are not persuaded that such an exemption is warranted and we are not including it in the final rules. We also note that neither the statute nor the final rules require disclosure regarding the names or location of employees.

100

See

note 69 and accompanying text.

101

See

note 70 and accompanying text.

The final rules do not extend the disclosure requirements to foreign private issuers that are exempt from Exchange Act registration pursuant to Rule 12g3-2(b). Foreign private issuers relying on Rule 12g3-2(b) are not required to file annual reports with the Commission and thus, they do not fall within the plain definition of resource extraction issuer provided in the statute. In addition, we believe that such an extension would be inconsistent with the premise of Rule 12g3-2(b).

102

Issuers that are exempt from Exchange Act registration pursuant to Rule 12g3-2(b) are not subject to reporting requirements under the Exchange Act, including any requirement to file an annual report.

102

See

note 73 and accompanying text.

C. Definition of “Commercial Development of Oil, Natural Gas, or Minerals”

1. Proposed Rules

Consistent with Section 13(q), the proposed rules defined “commercial development of oil, natural gas, or minerals” to include the activities of exploration, extraction, processing, export and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity. In proposing the definition, we intended to capture only activities that are directly related to the commercial development of oil, natural gas, or minerals, but not activities that are ancillary or preparatory, such as the manufacture of a product used in the commercial development of oil, natural gas, or minerals. In the Proposing Release, we noted that commercial development would not include transportation activities for a purpose other than export. In addition, we noted, as an example, that an issuer engaged in the removal of impurities, such as sulfur, carbon dioxide, and water, from natural gas after extraction but prior to its transport through the pipeline would be included in the definition of commercial development because such removal is generally considered to be a necessary part of the processing of natural gas in order to prevent corrosion of the pipeline.

2. Comments on the Proposed Rules

Commentators supported various aspects of the proposed definition

103

while suggesting clarifications or alternative approaches to the definition of commercial development. For example, numerous commentators suggested defining commercial development to include upstream activities (exploration and extraction of resources) only.

104

Commentators noted that Section 13(q) is entitled “Disclosure of Payments by Resource Extraction Issuers,” and as such, the statute “is directed toward those issuers who are engaged in extractive activities, or what are commonly referred to as `upstream activities.' ”

105

Commentators also noted that the EITI focuses on upstream activities

106

and that the statute directs the Commission “to consider consistency with EITI guidelines in the rules it develops.”

107

Several commentators noted they believed defining commercial development to include only upstream activities would be consistent with the Commission's existing definition of “oil and gas producing activities” in Regulation S-X Rule 4-10.

108

In addition, commentators

noted that adopting a definition of commercial development that is based on the definition of “oil and gas producing activities” in Regulation S-X would align it with a widely understood and accepted industry definition.

109

According to commentators advocating this approach, “commercial development of oil, natural gas, or minerals” would include “exploration, extraction, field processing and gathering/transportation activities to the first marketable location.”

110

Some commentators suggested clarifying, either in the regulatory text or in the adopting release, that the definition would include field processing activities prior to the refining or smelting phase, such as upgrading of bitumen and heavy oil and crushing and processing of raw ore, as well as transport activities related to the export of oil, natural gas, or minerals to the first marketable location.

111

In focusing exclusively on mining activities, one commentator stated that the definition of “commercial development” should include exploration, extraction, and production, and activities of processing and export to the extent that they are associated with production.

112

Under that approach, the definition would include steps in production prior to the smelting or refining phase, such as crushing of raw ore, processing of the crushed ore, and export of processed ore to the smelter, but would not include the actual smelting or refining. Several commentators stated that the definition should exclude transportation and other midstream or downstream activities, including export.

113

According to some of those commentators, “ `export' activities are not always directly associated with oil and gas producing activities, and can often be undertaken by issuers that are not engaged in `resource extraction' at all.”

114

They believed that requiring the reporting of payments by such issuers goes beyond the intended scope of the statute. One commentator urged us to state explicitly that “commercial development” does not include transportation activities and that transportation activities include the underground storage of natural gas.

115

Another commentator stated that an issuer should be allowed to choose whether to include transportation in the definition of “commercial development” as long as it discloses the basis for its definition.

116

103

See, e.g.,

letters from API 1, AngloGold, BP 1, CRS, Global Financial Integrity 2, NMA 2, and PWYP 1.

104

See

letters from API 1, AXPC, Barrick Gold, BP 1, Chevron, ExxonMobil 1, NMA 2, Petrobras, PWC, RDS 1, and Statoil.

105

See

letters from API 1 and ExxonMobil 1.

106

See, e.g.,

letters from API 1 and NMA 2.

107

See

letters from API 1 and ExxonMobil 1.

108

See, e.g.,

letters from API 1, Chevron, ExxonMobil 1, and RDS 1. Rule 4-10(a)(16) defines “oil and gas producing activities” to include:

(A) The search for crude oil, including condensate and natural gas liquids, or natural gas (“oil and gas”) in their natural states and original locations;

(B) The acquisition of property rights or properties for the purpose of further exploration or for the purpose of removing the oil or gas from such properties;

(C) The construction, drilling, and production activities necessary to retrieve oil and gas from their natural reservoirs, including the acquisition, construction, installation, and maintenance of field gathering and storage systems, such as:

(1)

Lifting the oil and gas to the surface; and

(2)

Gathering, treating, and field processing (as in the case of processing gas to extract liquid hydrocarbons); and

(D) Extraction of saleable hydrocarbons, in the solid, liquid, or gaseous state, from oil sands, shale, coalbeds, or other nonrenewable natural resources which are intended to be upgraded into synthetic oil or gas, and activities undertaken with a view to such extraction.

(ii) Oil and gas producing activities do not include:

(A) Transporting, refining, or marketing oil and gas;

(B) Processing of produced oil, gas or natural resources that can be upgraded into synthetic oil or gas by a registrant that does not have the legal right to produce or a revenue interest in such production;

(C) Activities relating to the production of natural resources other than oil, gas, or natural resources from which synthetic oil and gas can be extracted; or

(D) Production of geothermal steam. (Instructions omitted.)

109

See

letters from API 1 and ExxonMobil 1.

110

See, e.g.,

letter from API 1.

111

See

letters from AXPC, API 1, Barrick Gold, BP 1, Chevron, ExxonMobil 1, NMA 2, Petrobras, PWC, RDS 1, and Statoil.

112

See

letter from NMA 2.

113

See

letters from API 1, Barrick Gold, ExxonMobil 1, National Fuel Gas Supply Corporation (March 1, 2011) (“National Fuel”), and NMA 2.

114

See

letter from API 1.

See also

letter from ExxonMobil 1.

115

See

letter from National Fuel.

116

See

letter from Rio Tinto.

Other commentators stated that, at a minimum, the definition of “commercial development” must include the activities of exploration, extraction, processing, and export.

117

One commentator argued that, although the EITI does not include processing and export activities in its minimum disclosure requirements, the definition of “commercial development” must include those activities to be consistent with the plain language of Section 13(q) and because Congress intended the statute to go beyond the EITI's requirements.

118

Another commentator suggested expanding the proposed definition to include not just upstream activities, but also midstream activities (activities involved in trading and transport of resources), and downstream activities (activities involved in refining, ore processing, and marketing of resources).

119

The commentator agreed with the proposal that the definition should not include activities of a manufacturer of a product used in the commercial development of oil, natural gas, or minerals.

117

See

letters from CRS and PWYP 1.

118

See

letter from PWYP 1.

119

See

letter from Calvert.

Some commentators requested further clarification that covered transport activities include not just those related to export, but those related to the processing or marketing of resources, whether intra-country or cross-border, and whether by pipeline, rail, road, air, ship, or other means.

120

Two commentators requested that the Commission define “transportation activities” to include pipelines and security arrangements associated with a pipeline within a host country.

121

120

See

letters from Calvert, CRS, Earthworks, EIWG, HURFOM 1, PWYP pre-proposal, PWYP 1, and WRI.

121

See

letters from PWYP 1 and Syena;

see also

letter from Le Billon (suggesting coverage of transportation in general, security services, and trading).

Some commentators agreed with the proposal that “commercial development” should exclude activities that are ancillary or preparatory to commercial development.

122

One commentator suggested that the term focus on activities that “directly relate to, and provide material support for, the physical process of extracting and processing ore and producing minerals from that ore, including the export of ore to the smelter.”

123

The commentator further noted that activities that “do not directly and materially further this process, such as development of infrastructure and the community, as well as security support, generally would fall outside this definition, unless they include payments to governments that are expressly required by concession, contract, law, or regulation.”

124

Another commentator requested that we provide further detail about the extractive activities to which the rules would apply.

125

122

See

letters from NMA 2 and Statoil.

123

Letter from NMA 2.

124

Letter from NMA 2.

125

See

letter from Syena.

3. Final Rules

Consistent with Section 13(q) and the proposal, the final rules define “commercial development of oil, natural gas, or minerals” to include the activities of exploration, extraction, processing, and export, or the acquisition of a license for any such activity. As we noted in the Proposing Release, the statutory language sets forth a clear list of activities in the definition and gives us discretionary authority to include other significant activities relating to oil, natural gas, or minerals under the definition of “commercial development.” As described above, the final rules we are adopting generally track the language in the statute, and except for where the language or approach of Section 13(q) clearly deviates from the EITI, the final rules are consistent with the EITI. In

instances where the language or approach of Section 13(q) clearly deviates from the EITI, the final rules track the statute rather than the EITI. The definition of “commercial development” in Section 13(q) is broader than the activities covered by the EITI and thus clearly deviates from the EITI; therefore, we believe the definition of the term in the final rules should be consistent with Section 13(q).

As noted above, we received significant comment on this aspect of the proposal. Some commentators sought a more narrow definition than proposed, while other commentators sought a broader definition. We are not persuaded that we should narrow the scope of the definition in Section 13(q) by re-defining “commercial development” to only include upstream activities

126

or using the definition of “oil and gas producing activities” in Rule 4-10.

127

Nor are we persuaded that we should expand the covered activities

128

beyond those identified in the statute.

129

Under the final rules, the definition of commercial development includes all of the activities specified in the statutory definition, even though the statute includes activities beyond what is currently contemplated by the EITI.

130

126

See

note 104 and accompanying text.

127

See

note 108 and accompanying text.

128

See

note 119 and accompanying text.

129

We believe the phrase “as determined by the Commission” at the end of the definition of “commercial development” in Section 13(q) requires the Commission to identify any “other significant actions” that would be covered by the rules.

See

15 U.S.C. 78m(q)(1)(A). As noted above, we are not expanding the list of activities covered by the definition of “commercial development.” Therefore, to avoid confusion as to the scope of the activities covered by the rules, the final rules do not include the phrase “and other significant actions relating to oil, natural gas, or minerals.”

130

In the Proposing Release, we noted our understanding that the EITI criteria primarily focus on exploration and production activities.

See, e.g.,

Implementing the EITI,

at 24. We note that although export payments are not typically included under the EITI, some EITI programs have reported export taxes or related duties.

See

the 2005 EITI Report of Guinea, the 2008-2009 EITI Report of Liberia, and the 2006-2007 EITI Report of Sierra Leone,

available at

http://eiti.org/document/eitireports

Section 13(q) grants us the discretionary authority to include other significant activities relating to oil, natural gas, or minerals under the definition of “commercial development.”

131

In deciding whether to expand the statutory list of covered activities, we have considered both commentators' views and the need to promote consistency with EITI principles. We are not persuaded that we should extend the rules to activities beyond the statutory list of activities comprising “commercial development” because we are mindful of imposing additional costs resulting from adopting rules that extend beyond Congress' clear directive.

131

See

15 U.S.C. 78m(q)(1)(A).

As noted in the Proposing Release, the definition of “commercial development” is intended to capture only activities that are directly related to the commercial development of oil, natural gas, or minerals. It is not intended to capture activities that are ancillary or preparatory to such commercial development. Accordingly, we would not consider a manufacturer of a product used in the commercial development of oil, natural gas, or minerals to be engaged in the commercial development of the resource. For example, in contrast to the process of extraction, manufacturing drill bits or other machinery used in the extraction of oil would not fall within the definition of commercial development.

In response to commentators' requests for clarification of the activities covered by the final rules, we also are providing examples of activities covered by the terms “extraction,” “processing,” and “export.” We note, however, that whether an issuer is a resource extraction issuer will depend on its specific facts and circumstances.

As we noted in the Proposing Release, “extraction” includes the production of oil and natural gas as well as the extraction of minerals. Under the final rules, “processing” includes field processing activities, such as the processing of gas to extract liquid hydrocarbons, the removal of impurities from natural gas after extraction and prior to its transport through the pipeline, and the upgrading of bitumen and heavy oil. Processing also includes the crushing and processing of raw ore prior to the smelting phase. We do not believe that “processing” was intended to include refining or smelting,

132

and we note that refining and smelting are not specifically listed in Section 13(q). In addition, as some commentators noted, including refining or smelting within the final rules under Section 13(q) would go beyond what is currently contemplated by the EITI, which does not include refining and smelting activities.

133

132

The Commission's oil and gas disclosure rules identify refining and processing separately in the definition of “oil and gas producing activities,” which excludes refining and processing (other than field processing of gas to extract liquid hydrocarbons by the company and the upgrading of natural resources extracted by the company other than oil or gas into synthetic oil or gas).

See

Rule 4-10(a)(16)(ii) of Regulation S-X [17 CFR 210.4-10(a)(16)(ii)] and note 108. In addition, we note that in another statute adopted by Congress, the Sudan Accountability and Divestment Act of 2007 (SADA), relating to resource extraction activities, the statute specifically identifies “processing” and “refining” separately in defining “mineral extraction activities” and “oil-related activities.” 110 P.L. No. 174 (2007). Specifically, Section 2(7) of SADA defines “mineral extraction activities” to mean “exploring, extracting, processing, transporting, or wholesale selling of elemental minerals or associated metal alloys or oxides (ore) * * *.” Section 2(8) of SADA defines “oil-related activities” to mean in part “exporting, extracting, producing, refining, processing, exploring for, transporting, selling, or trading oil * * *.” The inclusion of “processing” and “refining” in SADA, in contrast to the language of Section 13(q), suggests that the terms have different meanings. Absent designation by the Commission, we do not believe that “refining” was intended to be included in the scope of the express terms in Section 13(q).

133

See, e.g.,

letters from API and NMA 2.

We believe that “export” includes the export of oil, natural gas, or minerals from the host country. We disagree with those commentators who maintained that “export” means the removal of the resource from the place of extraction to the refinery, smelter, or first marketable location.

134

Adopting such a definition would be contrary to the plain meaning of export,

135

and nothing in Section 13(q) or the legislative history suggests that Congress meant “export” to have such a meaning;

136

thus, we believe such a definition would be contrary to the intent of Section 13(q). We also are not persuaded by the argument presented by some commentators

137

that the final rules should be limited only to upstream activities because the reference in the title of Section 13(q) to “Resource Extraction Issuers” demonstrates Congressional intent that the statute should apply only to issuers engaged in extractive activities.

138

Accordingly, under the final rules, “commercial development” includes the export of oil, natural gas, or minerals and, therefore, the definition of

“resource extraction issuer” will capture an issuer that engages in the export of oil, natural gas, or minerals. We note that these definitions could require companies that may only be engaged in exporting oil, natural gas, or minerals and that may not have engaged in exploration, extraction, or processing of those resources to provide payment disclosure.

134

See

notes 111 and 112 and accompanying text.

135

For example, Merriam-Webster dictionary defines “export” to mean “to carry or send (as a commodity) to some other place (as another country).” Merriam-Webster Dictionary,

http://www.merriam-webster.com/dictionary/export

(last visited August 15, 2012).

See also

letters from CRS, Global Financial Integrity 2, and PWYP 1 (stating that exclusion of export activities would be inconsistent with plain language of statute).

136

See

note 118 and accompanying text.

137

See

note 105 and accompanying text.

138

The statutory definition of “commercial development” includes activities, such as processing and export, that go beyond mere extractive activities. In this regard, we note that “the title of a statute and the heading of a section cannot limit the plain meaning of the text * * *. For interpretative purposes, they are of use only when they shed light on some ambiguous word or phrase. They are but tools available for the resolution of a doubt. But they cannot undo or limit that which the text makes plain.”

Brotherhood of Railroad Trainmen

Baltimore & Ohio Railroad Co.,

331 U.S. 519, 528-29 (1947);

See also

letter from Statoil (stating that payments for infrastructure improvements are indirect payments that are not part of the core elements of the revenue stream for the commercial development of oil, natural gas, or minerals).

182

See

letter from RDS 1.

Several commentators recommended defining “other material benefits” to include social or community payments related to, for example, improvements of a host country's schools, hospitals, or universities.

183

While some commentators believed that, at a minimum, social or community payments should be included if required under the investment contract or the law of the host country,

184

other commentators suggested that voluntary social or community payments should be included as “other material benefits” because they represent an in-kind contribution to the state that, given their frequency, constitute part of the commonly recognized revenue stream of resource extraction.

185

One commentator noted that the Board of the EITI approved a revision to the EITI rules that would encourage EITI participants to disclose social payments that are material.

186

Some commentators also sought to include within the scope of “other material benefits” other types of payments, such as payments for security, personnel training, technology transfer, and local content and supply requirements, if required by the production contract.

187

183

See

letters from AngloGold, Barrick Gold, ERI 1, Earthworks, EG Justice, ONE, PWYP 1, Sen. Levin 1, and WRI.

184

See

letters from AngloGold, EG Justice (noting that in at least one country, Equatorial Guinea, companies engaged in upstream oil activities are required by that country's hydrocarbons law to invest in the country's development), ONE, and PWYP 1.

185

See

letters from Barrick Gold, ERI 1, Earthworks, and WRI.

186

See

letter from PWYP 1.

187

See, e.g.,

letters from ERI 1, Global Witness 1, and PWYP 1.

Several other commentators, however, maintained that social or community payments or other ancillary payments are considered indirect benefits under EITI guidelines, are typically not material, and therefore are not part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals.

188

Another commentator stated that payments for social and community needs and ancillary payments should be excluded from the final rules unless they are expressly required by the concession contract, law, or regulation.

189

188

See

letters from API 1, ExxonMobil 1, PetroChina, RDS 1, and Statoil.

189

See

letter from NMA 2.

c. Final Rules

While we are adopting the list of payment types largely as proposed, we are making some additions and clarifications to the list of payment types in response to comments. Specifically, the final rules are consistent with the definition of payment in Section 13(q) and state that the term “payment” includes:

• Taxes;

• Royalties;

• Fees;

• Production Entitlements;

• Bonuses;

• Dividends; and

• Payments for infrastructure improvements.

190

Under Section 13(q) and the final rules, the term “payment” is defined as a payment that is not de minimis, that is made to further the commercial development of oil, natural gas, or minerals, and includes specified types of payments. Thus, in determining whether disclosure is required, resource extraction issuers will need to consider whether they have made payments that fall within the specified types and otherwise meet the definition of payment.

As we noted in the Proposing Release and above, we interpret Section 13(q) to provide that the types of payments that are included in the statutory language should be subject to disclosure under our rules to the extent that the Commission determines that the types of payments and any “other material benefits” are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals. As noted, the statute provides that our determination should be consistent with the EITI's guidelines, to the extent practicable. Therefore, we are including all the payments listed above in the final rules because they are part of the commonly recognized revenue stream. We do not believe the final rules should include a broad, non-exhaustive list of payment types or category of “other material benefits,” as was suggested by some commentators,

191

because we do not believe including a broad, non-exclusive category would be consistent with our interpretation that the Commission must determine the “material benefits” that are part of the commonly recognized revenue stream. Thus, under the final rules, resource extraction issuers will be required to disclose only those payments that fall within the specified list of payment types in the rules, which include payment types that we have determined to be material benefits that are part of the commonly recognized revenue stream, and that otherwise meet the definition of “payment.”

191

See

note 175 and accompanying text.

We agree generally with those commentators who stated that it would be appropriate to add the types of payments included under the EITI but not explicitly mentioned under Section 13(q) to the list of payment types required to be disclosed because their inclusion under the EITI is evidence that they are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals.

192

Accordingly, the final rules add dividends to the list of payment types required to be disclosed.

193

The final rules clarify in an instruction that a resource extraction issuer generally need not disclose dividends paid to a government as a common or ordinary shareholder of the issuer as long as the dividend is paid to the government under the same terms as other shareholders. The issuer will however be required to disclose any dividends paid to a government in lieu of production entitlements or royalties.

194

We agree with the commentators that stated ordinary dividends would not comprise part of the commonly recognized revenue stream because such dividend payments are not made to further the commercial development of oil, natural gas, or minerals,

195

except in cases where the dividend is paid to a government in lieu of production entitlements or royalties.

192

See, e.g.,

letter from AngloGold.

193

The EITI describes dividends as “dividends paid to the host government as shareholder of the national state-owned company in respect of shares and any profit distributions in respect of any form of capital other than debt or loan capital.”

EITI Source Book,

at 27-28.

194

See

Instruction 7 to Item 2.01.

195

See

letters from Cleary and Statoil.

The final rules also include, in the list of payment types subject to disclosure, payments for infrastructure improvements, such as building a road or railway. Several commentators stated that, because resource extraction issuers often make payments for infrastructure improvements either as required by contract or voluntarily, those payments constitute other material benefits that are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals.

196

We further note that some EITI participants have included infrastructure improvements within the scope of their EITI program, even though those payments were not required under the EITI until recently.

197

In February 2011 the EITI Board issued revised EITI rules

198

that require participants to develop a process to disclose infrastructure payments under an EITI program.

199

Thus, including infrastructure payments within the list of payment types required to be disclosed under the final rules will make the rules more consistent with the EITI, as directed by the statute.

196

See

letters from AngloGold, Barrick Gold, ERI 1, Earthworks, EG Justice, Global Witness 1, ONE, and PWYP 1.

197

See

the 2009 EITI report for Ghana (reported under Mineral Development Fund contributions), the 2008 EITI report for the Kyrgyz Republic (reported under social and industrial infrastructure payments), the 2008-2009 EITI report for Liberia (reported under county and community contributions), and the 2008 EITI report for Mongolia (reported under donations to government organizations).

198

See EITI Rules 2011, available at http://eiti.org/document/rules.

199

See

EITI Requirement 9(f) in

EITI Rules 2011,

at 24 (“Where agreements based on in-kind payments, infrastructure provision or other barter-type arrangements play a significant role in the oil, gas or mining sectors, the multi-stakeholder group is required to agree [to] a mechanism for incorporating benefit streams under these agreements in to its EITI reporting process * * *.”). The EITI Board has established a procedure to implement the new rules. According to the procedure, any country admitted as an EITI candidate on or after July 1, 2011 must comply with the new rules. Compliant countries are encouraged to make the transition to the new rules as soon as possible. The procedure also establishes a transition schedule for countries that are implementing the EITI but are not yet compliant.

See

the EITI newsletter,

available at http://eiti.org/news-events/eiti-board-agrees-transition-procedures-2011-edition-eiti-rules.

Under the final rules, consistent with the recommendation of some commentators,

200

a resource extraction issuer must disclose payments that are not de minimis that it has made to a foreign government or the U.S. Federal Government for infrastructure improvements if it has incurred those payments, whether by contract or otherwise, to further the commercial development of oil, natural gas, or minerals. For example, payments required to build roads to gain access to resources for extraction would be covered by the final rules. If an issuer is obligated to build a road rather than paying the host country government to build the road, the issuer would be required to disclose the cost of building the road as a payment to the government to the extent that the payment was not de minimis.

201

200

See

note 176 and accompanying text.

201

For a discussion of the treatment of in-kind payments under the final rules, see the text accompanying note 212. We note some commentators suggested infrastructure payments are usually not material compared to the other types of payments required to be disclosed under Section 13(q) and that infrastructure payments are of a de minimis nature compared to the overall costs of commercial development.

See

API 1, ExxonMobil 1, RDS 1, and Statoil. As discussed further below, the not de minimis requirement applies to all payment types, not just infrastructure payments.

The final rules do not require a resource extraction issuer to disclose social or community payments, such as payments to build a hospital or school, because it is not clear that these types of payments are part of the commonly recognized revenue stream. We note commentators' views on whether social or community payments should be included varied more than their views on whether payments for infrastructure improvements should be included. Further, this treatment of social or community payments is consistent with the EITI, which encourages, but does not require, EITI participants to include social payments and transfers in EITI

programs if the participants deem the payments to be material.

202

See

EITI Requirement 9(g) in

EITI Rules 2011,

at 24. Resource extraction issuers could, of course, voluntarily include information about these types of payments in their disclosure on Form SD.

Consistent with the proposal and Section 13(q), the final rules will require a resource extraction issuer to disclose fees, including license fees, and bonuses paid to further the commercial development of oil, natural gas, or minerals. In response to requests by some commentators,

203

we are adding an instruction to clarify that fees include rental fees, entry fees, and concession fees, and bonuses include signature, discovery, and production bonuses.

204

As commentators noted,

205

the EITI Source Book specifically mentions these types of fees and bonuses as payments that are typically disclosed by EITI participants.

206

We believe this demonstrates that these types of fees and bonuses are part of the commonly recognized revenue stream, and therefore the final rules include an instruction clarifying that disclosure of these payments is required. The fees and bonuses identified are not an exclusive list, and there may be other fees and bonuses a resource extraction issuer would be required to disclose. A resource extraction issuer will need to consider whether payments it makes fall within the payment types covered by the rules.

203

See

note 160 and accompanying text.

204

See

Instruction 6 to Item 2.01 of Form SD.

205

See, e.g.,

letters from API 1 and ExxonMobil 1.

206

See

the

EITI Source Book,

at 28.

Consistent with the proposal and Section 13(q), the final rules will require a resource extraction issuer to disclose taxes. In addition, the final rules include an instruction, as proposed, to clarify that a resource extraction issuer will be required to disclose payments for taxes levied on corporate profits, corporate income, and production, but will not be required to disclose payments for taxes levied on consumption, such as value added taxes, personal income taxes, or sales taxes.

207

This approach is consistent with the statute, which includes taxes in the list of payment types required to be disclosed, and with the EITI.

208

In response to concerns expressed about the difficulty of allocating certain payments that are made for obligations levied at the entity level, such as corporate taxes, to the project level,

209

the final rules provide that issuers may disclose those payments at the entity level rather than the project level.

210

207

See

Instruction 5 to Item 2.01 of Form SD.

208

The EITI Source Book specifically mentions the inclusion of taxes levied on income, production or profits and the exclusion of taxes levied on consumption, such as value-added taxes, personal income taxes or sales taxes.

See

the

EITI Source Book,

at 28.

209

See

note 155 and accompanying text.

210

See

discussion in Section II.F.2.c below.

We are not persuaded that there are other types of payments that currently constitute material benefits that are part of the commonly recognized revenue stream. Therefore, the final rules do not include any additional payment types in the list of payment types resource extraction issuers must disclose.

As previously noted, many commentators supported the inclusion of in-kind payments, particularly in connection with production entitlements.

211

Under the final rules, resource extraction issuers must disclose payments of the types identified in the rules that are made in kind.

212

Because Section 13(q) specifies that the final rules require the disclosure of the type and total amount of payments made for each project and to each government, issuers will need to determine the monetary value of in-kind payments.

213

Consistent with suggestions we received on disclosing these types of payments,

214

the final rules specify that issuers may report in-kind payments at cost, or if cost is not determinable, fair market value, and provide a brief description of how the monetary value was calculated.

215

211

See

note 170 and accompanying text. In-kind payments include, for example, making a payment to a government in oil rather than a monetary payment.

212

We note that this is consistent with the reporting of production entitlements under the EITI.

See

the

EITI Source Book,

at 27.

213

Although a couple of commentators suggested that issuers be permitted to report payments in cash or in kind, we note that Section 13(q) requires the type and total amount of payments made for each project and to each government, and total amount of payments by category. In order for issuers to provide a these total amounts, we believe it is necessary to provide a monetary value for any in-kind payments. Thus, the final rules require that issuers provide a monetary value for payments made in kind. In addition, in light of the requirement in Section 13(q) to tag the information to identify the currency in which the payments were made, the final rules instruct issuers providing a monetary value for in-kind payments to tag the information as “in kind” for purposes of the currency tag.

214

See

note 173 and accompanying text.

215

See

Instruction 1 to Item 2.01 of Form SD.

Finally, a resource extraction issuer may not conceal the true nature of payments or activities that otherwise would fall within the scope of the final rules, or create a false impression of the manner in which it makes payments, in order to circumvent the disclosure requirements. As suggested by one commentator,

216

to address the potential for circumvention of the disclosure requirements, the final rules include an anti-evasion provision. This provision is intended to emphasize the substance over the form or characterization of an activity or payment. For example, a resource extraction issuer that typically engages in a particular activity that otherwise would be covered under the definition of commercial development of oil, natural gas, or minerals, and that changes the way it categorizes the same activity after the issuance of final rules to avoid disclosing payments related to the activity may be viewed as seeking to evade the disclosure requirements. Similarly, a resource extraction issuer that typically makes payments of the type that would otherwise be covered under the final rules and that changes the way it categorizes or makes payments after issuance of the final rules so that the payments are not technically required to be disclosed may be viewed as seeking to evade the disclosure requirements. The final rules will require disclosure with respect to activities or payments that, although not in form or characterization of one of the categories specified under the final rules, are part of a plan or scheme to evade the disclosure requirements under Section 13(q).

217

216

See

letter from Sen. Levin (February 17, 2012) (“Sen. Levin 2”).

217

See

Instruction 9 to Item 2.01 of Form SD.

2. The “Not De Minimis” Requirement

a. Proposed Rules

Section 13(q) and the proposal define payment, in part, to be a payment that is “not de minimis.” Neither the statute nor the proposed rules define “not de minimis.” Under Section 13(q) and the proposal, if the other standards for disclosure are met, resource extraction issuers would be required to disclose payments made that are “not de minimis.”

Under the EITI, countries are free to establish a materiality level for disclosure.

218

Section 13(q) established

the threshold for payment disclosure as “not de minimis” rather than requiring disclosure of “material” payments. Given the use of the phrase “not de minimis,” we stated in the Proposing Release our preliminary belief that “not de minimis” does not equate with a materiality standard. In doing so, we noted that that the term “de minimis” is generally defined as something that is “lacking significance or importance” or “so minor as to merit disregard.”

219

We also noted that we preliminarily believed that the term is sufficiently clear and that further explication was unnecessary.

218

For example, countries may establish a materiality level based on the size of payments or the size of companies subject to disclosure.

See Implementing the EITI,

at 30. The EITI Source Book notes that a benefit stream is material “if its omission or misstatement could distort the final EITI report” for the country.

EITI Source Book,

at 26. Because there is no pre-determined materiality level prescribed for all countries implementing the EITI, the multi-stakeholder group in each EITI-implementing country determines the threshold for disclosure that is appropriate for that country.

See Implementing the EITI,

at 31. The EITI recommends the following alternatives for considering a benefit stream to be material:

“Alternative 1: [if it is] more than A% of the host government's estimated total production value for the reporting period;

Alternative 2: [if it is] more than B% of the company's estimated total production value in the host country for the reporting period; or

Alternative 3: [if it is] more than USD C million [or local currency D million].”

EITI Source Book,

at 27.

219

See

the definition of “de minimis” in Merriam-Webster Dictionary,

available at http://www.merriam-webster.com/dictionary/deminimis.

We note, in contrast, that Rule 12b-2 under the Exchange Act [17 CFR 240.12b-2] defines “material” when used to qualify a requirement for the furnishing of information as to any subject, as limited to information required to those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to buy or sell the securities registered.

See also

Rule 405 under the Securities Act [17 CFR 230.405]. In addition, the U.S. Supreme Court has held that, in a securities fraud suit, an omitted fact is material if there is a substantial likelihood that its disclosure would have been considered significant by a reasonable investor.

See Basic Inc.

Levinson,

485 U.S. 224 (1988) and

TSC Industries. Inc., et al.

Northway, Inc.,

426 U.S. 438 (1976).

b. Comments on the Proposed Rules

We received significant comment on this aspect of the proposal. Some commentators agreed that it is not necessary to define “not de minimis.”

220

Two of those commentators suggested that an issuer should be required to disclose the methodology used to determine what is “not de minimis.”

221

One commentator noted that “not de minimis” is a commonly-understood term.

222

220

See

letters from Cleary, Global Witness 1, NMA 2, PetroChina, and Rio Tinto.

221

See

letters from NMA 2 and Rio Tinto.

222

See

letter from Global Witness 1. This commentator suggested that, in the alternative, we should define the term as an amount that meets or exceeds the lesser of (1) $1,000 for an individual payment or $15,000 in the aggregate over a period, or (2) a particular percentage of the issuer's per project expenditures. It also noted that it believes “not de minimis” should be assessed relative to the total expenditures on a project and not relative to the size or valuation of the entity making the payments.

Most commentators that addressed the issue urged the Commission to define “not de minimis.”

223

Several commentators stated that the Commission should avoid adopting a definition that uses one or more quantitative measures and, instead, should define “not de minimis” to mean material.

224

According to those commentators, a definition based on materiality would be consistent with the EITI and the Commission's longstanding disclosure regime.

225

One commentator stated that adopting a definition of “not de minimis” based on materiality would encourage “reasonable consistency of disclosure across all issuers” and result “in the disclosure of all material facts necessary for investors” without the Commission having to provide further guidance on how to determine materiality.

226

223

See, e.g.,

letters from AngloGold, Barrick Gold, BP 1, CalSTRS, Calvert, CRS, Earthworks, Harrington Investments, Inc. (January 19, 2011) (“HII), RDS 1, Sen. Levin 1, and SIF.

224

See

letters from API 1, BP 1, Chevron, ExxonMobil 1, RDS 1, and Statoil.

225

See, e.g.,

letters from API 1 and Chevron. According to one commentator, adopting a definition based on specific quantitative measures rather than existing materiality guidance would “substantially increase the likelihood of overburdening issuers and users with large volumes of unnecessary and immaterial detail * * * and significantly increase the regulatory burden and cost of compliance.”

See

letter from Chevron.

See also

letters from API 1 and ExxonMobil 1. Other commentators believed that an issuer should be able to rely on materiality principles for guidance when determining whether a payment is “not de minimis,” but did not think that a definition of “not de minimis” was necessary.

See

letters from Cleary, NMA 2, PetroChina, and Rio Tinto.

226

See

letter from API 1.

Other commentators, however, agreed with our belief that “not de minimis” does not equate with material.

227

Several commentators noted that a provision of the U.S. federal tax code includes the following definition of “de minimis”: “[a] property or service the value of which is * * * so small as to make accounting for it unreasonable or administratively impracticable.”

228

One commentator stated that if we were to adopt a qualitative, principle-based standard when defining de minimis, it should be based on “the relevance of a payment in relation to a country's size” rather than with regard to a company's overall payments, assets or similar metric.

229

A few commentators requested “that a reasonable minimum threshold for payments to be reported should be set” without suggesting a particular minimum threshold.

230

227

See, e.g.,

letters from Barrick Gold, Calvert, ERI 1, Global Witness 1, HURFOM 1, PWYP 1, and TIAA.

228

Letter from Calvert (quoting 26 U.S.C. § 132(e)(1));

see also

letters from Global Witness 1, PWYP 1, and TIAA.

229

See

letter from PWYP 1.

230

See

letters from Derecho, Greenpeace, and Guatemalan Forest Communities.

Several commentators urged us to adopt a definition of “not de minimis” based on one or more quantitative measures.

231

Commentators stated that such a definition was necessary to provide clarity regarding the disclosure requirements.

232

Two commentators suggested using an absolute dollar amount in the definition because they believed that such a standard would be easier to apply than a percentage, would reduce compliance costs, and would help ensure consistent disclosure and comparability.

233

Another commentator similarly believed that the use of an absolute dollar amount would help level the playing field among issuers.

234

231

See

letters from AngloGold, Barrick Gold, CalSTRS, CRS, Earthworks, HII, PWYP 1 (suggesting both qualitative and quantitative standards), RWI 1, Sen. Levin 1, and SIF. Another commentator noted that we have adopted objective standards in other contexts and requested that we do so for the definition of “not de minimis.” That commentator further suggested that we may need to adopt different quantitative standards for large-cap and small-cap companies, but it did not recommend particular standards.

See

letter from AXPC.

232

See

letters from Barrick Gold and Talisman.

233

See

letters from AngloGold (recommending defining “de minimis” to mean “any payment or series of related payments made at the tax-paying entity level which in the aggregate is less than U.S.$1,000,000”) and CRS (recommending an amount “significantly less than $100,000” and as an aggregate of payments of the same type during the reporting period covered).

234

See

letter from Talisman (noting that it currently reports payments in excess of one million dollars and supporting a minimum level of reporting of one million dollars).

Commentators offered various suggestions for a quantitative threshold. Some commentators suggested requiring the reporting of payments above $10,000.

235

In addition, numerous commentators signed a petition supporting a de minimis threshold “in the low thousands (U.S. dollars) to prevent millions of dollars from going unreported.”

236

Several commentators suggested that we should define “not de minimis” using a standard similar to a listing standard of the London Stock Exchange's Alternative Investment Market (“AIM”), which requires disclosure of any payment made to any government or regulatory authority by an oil, gas, or mining company registrant that, alone or as a whole, is over £10,000, or approximately $15,000.

237

One commentator suggested a reporting threshold “in the tens of

thousands.”

238

Another commentator believed that we should provide a specific threshold and that it should be significantly less than $100,000.

239

The commentator further stated that the threshold should be defined as an aggregate of payments of the same type during the reporting period covered. Another commentator suggested using an absolute dollar amount that would vary depending on the size of an issuer's market capitalization.

240

235

See

letters designated “Type B” (suggesting $10,000 threshold without elaboration) and letter from Le Billon (stating that a “minimal value of $10,000 would be consistent with many legislations seeking to track financial flows, e.g. for the purpose of money laundering”).

236

ONE Petition.

237

See

letters from CalSTRS, HII, RWI 1, Sen. Levin 1, SIF, and WACAM. Several commentators suggested defining the term further to require disclosure of any individual payment that exceeded $1,000 as well as payments of the same type that in the aggregate exceeded $15,000.

See

letters from Earthworks, Global Witness 1, Global Witness 3, and PWYP 1.

238

See

letter from Global Movement for Budget Transparency, Accountability and Participation (March 30, 2012) (“BTAP”).

239

See

letter from CRS.

See also

letter from PWYP 1 (stating that $100,000 would not be an appropriate de minimis threshold because $100,000 could exceed the annual payments, such as lease rents or license fees, in some projects).

240

See

letter from AXPC. That commentator, however, did not specify any particular dollar amount or corresponding size of market capitalization.

One commentator suggested defining “de minimis” to mean “any payment or series of related payments made at the tax-paying entity level which in the aggregate is less than U.S.$1,000,000.”

241

Another commentator similarly suggested using an absolute dollar amount threshold of $1,000,000 while noting that it currently reports payments in excess of that amount. According to that commentator, its “experience supports [$1,000,000] as the minimum level of reporting to ensure that the objectives of revenue transparency are met while not clouding the data with largely irrelevant information.”

242

One commentator, however, opposed a “not de minimis” threshold of $1,000,000 because it believed such a threshold would exclude many payments made in the extractive industry.

243

Another commentator similarly cautioned against setting the “not de minimis” threshold too high because it would leave important payment streams undisclosed and could encourage companies and governments to structure payments in future contracts in a way that would avoid the disclosure requirement.

244

241

See

letter from AngloGold.

242

Letter from Talisman.

243

See

letter from ERI 3 (referring to disclosure in Sierra Leone's 2010 EITI Report and noting that a $1,000,000 threshold would exclude payments for half of the companies reporting in Sierra Leone).

See also

ONE Petition (urging the Commission to adopt a final rule that “sets the de minimis threshold in the low thousands (U.S. dollars) to prevent millions of dollars from going unreported”).

244

See

letter from Rep. Frank

et al.

Other commentators suggested adopting a quantitative definition of “not de minimis” that uses a relative measure, either alone or with an absolute dollar amount.

245

One commentator suggested defining “not de minimis” to mean five percent or more of an issuer's upstream expenses or revenues.

246

Another commentator suggested defining “not de minimis” as the lesser of two percent of the issuer's consolidated expenditures and $1,000,000.

247

According to that commentator, using a standard based on the lesser of a dollar amount or a percentage of expenses would reflect the size of a company but still ensure the disclosure of significant payments by a larger company.

248

245

See

letters from Barrick Gold and RDS 1 (RDS suggested a quantitative definition if the Commission determines not to define the term as “material”).

246

See

letter from RDS 1.

247

See

letter from Barrick Gold (suggested “consolidated expenditures” but did not provide an explanation of the term).

248

See

letter of Barrick Gold.

c. Final Rules

We have determined to adopt a definition of “not de minimis” to provide clear guidance regarding when a resource extraction issuer must disclose a payment.

249

We have considered whether to define the term using a materiality standard, as some commentators have recommended.

250

We continue to believe that given the use of the phrase “not de minimis” in Section 13(q) rather than use of a materiality standard, which is used elsewhere in the federal securities laws and in the EITI,

251

“not de minimis” was not intended to equate to a materiality standard.

249

See, e.g.,

letters from Barrick Gold and Talisman.

250

See

note 224 and accompanying text.

251

See

note 218 and accompanying text.

More fundamentally, for purposes of Section 13(q), we do not believe the relevant point of reference for assessing whether a payment is “not de minimis” is the particular issuer. Rather, because the disclosure is designed to further international transparency initiatives regarding payments to governments for the commercial development of oil, natural gas, or minerals, we think the better way to consider whether a payment is “not de minimis” is in relation to host countries. We recognize that issuers may have difficulty assessing the significance of particular payments for particular countries or recipient governments and, as explained below, are adopting a $100,000 threshold that, we believe, will facilitate compliance with the statute by providing clear guidance regarding the payments that resource extraction issuers will need to track and report and will promote the transparency goals of the statute. In addition, we believe the threshold we are adopting will result in a lesser compliance burden than would otherwise be associated with the final rules if a lower threshold were used because issuers may track and report fewer payments than they would be required to report if a lower threshold was adopted.

Of the suggested approaches for defining “not de minimis,” we believe that a standard based on an absolute dollar amount is the most appropriate because it will be easier to apply than a qualitative standard or a relative quantitative standard based on a percentage of expenses or revenues of the issuer,

252

or some other fluctuating measure, such as a percentage of the host government's or issuer's estimated total production value in the host country for the reporting period. Using an absolute dollar amount threshold for disclosure purposes should help reduce compliance costs and may also promote consistency and comparability.

253

252

See

notes 231-233 and accompanying text.

253

See

note 233 and accompanying text. Furthermore, some commentators who suggested a relative standard did not provide definitions, or suggested a standard based on upstream payments only even though the required disclosure includes additional payments.

The final rules define “not de minimis”

254

to mean any payment, whether made as a single payment or series of related payments, that equals or exceeds $100,000 during the most recent fiscal year.

255

The final rules provide that in the case of any arrangement providing for periodic payments or installments (

e.g.,

rental fees), a resource extraction issuer must consider the aggregate amount of the related periodic payments or installments of the related payments in determining whether the payment threshold has been met for that series of payments, and accordingly, whether disclosure is required.

256

As discussed further below, we considered a variety of alternatives when considering what, if any, definition would be appropriate for “not de minimis.”

254

See

Item 2.01(c)(7) of Form SD.

255

For example, a resource extraction issuer that paid a $150,000 signature bonus would be required to disclose that payment. As another example, a resource extraction issuer obligated to pay royalties to a government annually and that paid $10,000 in royalties on a monthly basis to satisfy its obligation would be required to disclose $120,000 in royalties.

256

See

Item 2.01(c)(7) of Form SD. This is similar to other instructions in our rules requiring disclosure of a series of payments.

See, e.g.,

Instructions 2 and 3 to Item 404(a) of Regulation S-K (17 CFR 229.404(a)).

We believe that a $100,000 threshold is more appropriate than, and an acceptable compromise to, the amounts

suggested by commentators.

257

Commentators supporting an absolute dollar amount differed widely on the amount best suited for the threshold, with commentators suggesting an amount in the “low thousands” of U.S. dollars,

258

$10,000,

259

$15,000,

260

an amount less than $100,000,

261

and $1,000,000.

262

We are not adopting a threshold in the low thousands of U.S. dollars, $10,000, or $15,000 threshold. In light of the comments received, we are concerned that those amounts could result in undue compliance burdens and raise competitive concerns for many issuers. While supporters of a $15,000 threshold noted its similarity to the AIM listing requirement, we do not believe that applying the threshold used in that listing requirement is appropriate for purposes of Section 13(q) because that threshold was designed to apply to the smaller companies that comprise the AIM market.

263

257

The Proposing Release solicited comment on a wide range of absolute dollar amounts for the “de minimis” threshold, and requested data to support the definitions suggested by commentators.

See

Part II.D.2. of the Proposing Release. We received little data that was helpful. Although one commentator submitted data regarding payments made by some oil companies for tuition, rent, and living expenses for the students and relatives of officials in Equatorial Guinea, those payments are not within the list of payments types specified by Section 13(q).

See

letter from Sen. Levin 2. Another commentator noted that, based on Sierra Leone's 2007 EITI Reconciliation Report (published in 2010), a $1 million threshold would result in non-disclosure of over 40% of payments made by mining companies and all payments made by half of EITI reporting companies in that country.

See

letter from ERI 3. Although the letter provides information about payments made to Sierra Leone, it appears that the companies for which data is provided would not be subject to the reporting requirements under Section 13(q) and the related rules.

258

See

ONE Petition.

259

See

letters designated Type B and letter from Le Billon.

260

See

letters from CalSTRS, ERI 3, HII, RWI 1, Sen. Levin 1, SIF, and WACAM.

261

See

letters from CRS and PWYP 1.

262

See

letters from AngloGold and Talisman;

see also

letter from Barrick Gold.

263

We also note that the AIM requirement differs from the disclosure required by Section 13(q) and the final rules in that the AIM only requires disclosure of payments by extractive issuers as an initial listing requirement and does not impose an ongoing reporting requirement related to those payments.

Although a few commentators suggested we use $1,000,000 as the threshold,

264

including one commentator that stated it reports payments to governments in excess of $1,000,000,

265

we do not believe that $1,000,000 would be an appropriate threshold. While many EITI-reporting companies have reported payments in excess of $1,000,000,

266

we note that the EITI provides that countries may establish a “materiality” level for disclosure, which, as noted, is different from the “not de minimis” standard in Section 13(q). We agree with those commentators that cautioned against setting the threshold too high so as to leave important payment streams undisclosed.

267

Adopting $100,000 as the “not de minimis” threshold furthers the purpose of Section 13(q) and will result in a lesser compliance burden than would otherwise be associated with the final rules if a lower threshold were used.

264

See

letters from AngloGold, Barrick Gold, and Talisman.

265

See

letter from Talisman.

266

See, e.g.,

the 2009 EITI Report for Ghana (regarding payment of royalties, corporate taxes, and dividends); the 2006-2008 EITI Report for Nigeria (regarding payment of petroleum taxes, royalties and signature bonuses); the 2004-2007 EITI Report for Peru (regarding payment of corporate income taxes and royalties); and the 2009 EITI Report for Timor Leste (regarding payment of petroleum taxes).

267

See

letters from ERI 3 and Rep. Frank

et al.

Although adoption of a $100,000 threshold may be viewed as somewhat high by some commentators

268

and may result in some smaller payments not being reported, we believe this threshold strikes an appropriate balance between concerns about the potential compliance burdens of a lower threshold and the need to fulfill the statutory directive that payments greater than a “de minimis” amount be covered. We acknowledge that a “not de minimis” definition based on a materiality standard, or a much higher amount, such as $1,000,000, would lessen commentators' concerns about the compliance burden and potential for competitive harm.

269

We believe, however, that use of the term “not de minimis” in Section 13(q) indicates that a threshold quite different from a materiality standard, and significantly less than $1,000,000, is necessary to further the transparency goals of the statute.

268

See, e.g.,

letters from CRS (supporting a “not de minimis” threshold that is significantly less than $100,000) and PWYP 1 (supporting a “not de minimis” threshold of $1,000 for individual payments and $15,000 for payments in the aggregate);

see also

letter from ERI 3.

269

See

notes 224, 241, and 242 and accompanying text.

In adopting the final rules, we believe an absolute, rather than relative, threshold may make the requirement easier for issuers to comply with and allow for increased comparability of payment disclosures. We considered adopting a threshold that would have required disclosure of the lesser of a specific dollar amount or a percentage of expenses, as suggested by commentators.

270

We determined not to adopt such an approach because we agree with other commentators that noted such an approach would be more difficult for issuers to comply with, could raise the compliance costs associated with tracking and reporting the information, and would make comparability of disclosure more difficult.

271

For similar reasons, we decided not to adopt a threshold that exclusively used a percentage threshold based on an issuer's expenses or revenues, or some other fluctuating measure. We note that exclusively using a percentage threshold based on an issuer's expenses

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