# Disclosure of Payments by Resource Extraction Issuers

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2015-31702

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** December 23, 2015
- **Citation:** 80 FR 80058

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249b
[Release No. 34-76620; File No. S7-25-15]
RIN 3235-AL53
Disclosure of Payments by Resource Extraction Issuers

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

We are proposing Rule 13q-1 and an amendment to Form SD to implement Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to disclosure of payments by resource extraction issuers. Rule 13q-1 was initially adopted by the Commission on August 22, 2012, but it was subsequently vacated by the U.S. District Court for the District of Columbia. Section 1504 of the Dodd-Frank Act added Section 13(q) to the Securities Exchange Act of 1934, which directs the Commission to issue rules requiring resource extraction issuers to include in an annual report information relating to any payment made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer, to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals. Section 13(q) requires a resource extraction issuer to provide information about the type and total amount of such payments made for each project related to the commercial development of oil, natural gas, or minerals, and the type and total amount of payments made to each government. In addition, Section 13(q) requires a resource extraction issuer to provide information about those payments in an interactive data format.

DATES:

We are providing two comment periods for this proposal. Initial comments are due on January 25, 2016. Reply comments, which may respond only to issues raised in the initial comment period, are due on February 16, 2016. In developing the final rules, the Commission may rely on both new comments and comments that have been received to date, including those that were provided in connection with the prior rules that the Commission issued under Section 13(q).

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment forms (
http://www.sec.gov/rules/proposed.shtml
);

• Send an email to
rule-comments@sec.gov
. Please include File Number S7-25-15 on the subject line; or

• Use the Federal Rulemaking Portal (
http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-25-15. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (
http://www.sec.gov/rules/proposed.shtml
). Comments also are available for public inspection and copying in the Commission's Public Reference Room, 100 F Street NE., Room 1580, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

Studies, memoranda or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the SEC's Web site. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at
www.sec.gov
to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Shehzad K. Niazi, Special Counsel; Office of Rulemaking, Division of Corporation Finance, at (202) 551-3430; or Elliot Staffin, Special Counsel; Office of International Corporate Finance, Division of Corporation Finance, at (202) 551-3450, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

We are proposing Rule 13q-1
1

and an amendment to Form SD
2

under the Securities Exchange Act of 1934 (“Exchange Act”).
3

1
17 CFR 240.13q-1.

2
17 CFR 249.448.

3
15 U.S.C. 78a
et seq.

Table of Contents

I. Introduction and Background

A. Section 13(q) of the Exchange Act

B. The 2012 Rules and Litigation

C. Developments Subsequent to the 2013 Court Decision

D. Summary of Proposed Rules

E. Objectives of Section 13(q)'s Required Disclosures and the Proposed Rules

1. The U.S. Government's Foreign Policy Interest in Reducing Corruption in Resource-Rich Countries

2. Reasons for Proposing Issuer-Specific, Project-Level, Public Disclosures of Resource Extraction Payments

II. Proposed Rules Under Section 13(q)

A. Definition of “Resource Extraction Issuer”

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

C. Definition of “Payment”

1. Types of Payments

2. The “Not De Minimis” Requirement

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

E. Definition of “Project”

1. General

2. The API Proposal

F. Definition of “Foreign Government” and “Federal Government”

G. Disclosure Required and Form of Disclosure

1. Annual Report Requirement

2. Public Filing

3. Exemption From Compliance

4. Alternative Reporting

5. Exhibits and Interactive Data Format Requirements

6. Treatment for Purposes of Securities Act and Exchange Act

H. Effective Date

I. General Request for Comment

III. Economic Analysis

A. Introduction and Baseline

B. Potential Effects Resulting From the Payment Reporting Requirement

1. Benefits

2. Costs

C. Potential Effects Resulting From Specific Implementation Choices

1. Exemption From Compliance

2. Alternative Reporting

3. Definition of Control

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

5. Types of Payments

6. Definition of “Not De Minimis”

7. Definition of “Project”

8. Annual Report Requirement

9. Exhibit and Interactive Data Requirement

D. Request for Comments

IV. Paperwork Reduction Act

A. Background

B. Estimate of Issuers

C. Estimate of Issuer Burdens

D. Solicitation of Comments

V. Small Business Regulatory Enforcement Fairness Act

VI. Initial Regulatory Flexibility Act Analysis

A. Reasons for, and Objectives of, the Proposed Action

B. Legal Basis

C. Small Entities Subject to the Proposed Rules

D. Reporting, Recordkeeping, and Other Compliance Requirements

E. Duplicative, Overlapping, or Conflicting Federal Rules

F. Significant Alternatives

G. Request for Comment

I. Introduction and Background

On August 22, 2012, the Commission adopted a rule and form amendments
4

(the “2012 Rules”) to implement Section 13(q) of the Exchange Act. The 2012 Rules were vacated by the U.S. District Court for the District of Columbia by order dated July 2, 2013. In light of the court's order, we are re-proposing Rule 13q-1 and proposing an amendment to Form SD to implement Section 13(q).

4

See
Exchange Act Release No. 67717 (Aug. 22, 2012), 77 FR 56365 (Sept. 12, 2012)
available at http://www.sec.gov/rules/final/2012/34-67717.pdf
(the “2012 Adopting Release”).
See also
Exchange Act Release No. 63549 (Dec. 15, 2010), 75 FR 80978 (Dec. 23, 2010)
available at http://www.sec.gov/rules/proposed/2010/34-63549.pdf
(the “2010 Proposing Release”).

A. Section 13(q) of the Exchange Act

Section 13(q) was added in 2010 by Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Act”).
5

It directs the Commission to “issue final rules that require each resource extraction issuer to include in an annual report . . . information relating to any payment made by the resource extraction issuer, a subsidiary of the resource extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals, including—(i) the type and total amount of such payments made for each project of the resource extraction issuer relating to the commercial development of oil, natural gas, or minerals, and (ii) the type and total amount of such payments made to each government.”
6

5
Public Law 111-203 (July 21, 2010).

6
15 U.S.C. 78m(q)(2)(A). As discussed further below, Section 13(q) also specifies that the Commission's rules must require certain information to be provided in interactive data format.

Based on the statutory text and the legislative history, we understand that Congress enacted Section 1504 to increase the transparency of payments made by oil, natural gas, and mining companies to governments for the purpose of the commercial development of their oil, natural gas, and minerals. As discussed in more detail below, the legislation reflects U.S. foreign policy interests in supporting global efforts to improve transparency in the extractive industries. The goal of such transparency is to help combat global corruption and empower citizens of resource-rich countries to hold their governments accountable for the wealth generated by those resources.
7

7

See, e.g.,
156 Cong. Rec. S3816 (daily ed. May 17, 2010) (Statement of Senator Lugar, one of the sponsors of Section 1504) (“Adoption of the Cardin-Lugar amendment would bring a major step in favor of increased transparency at home and abroad. . . . More importantly, it would help empower citizens to hold their governments to account for the decisions made by their governments in the management of valuable oil, gas, and mineral resources and revenues. . . . The essential issue at stake is a citizen's right to hold its government to account. Americans would not tolerate the Congress denying them access to revenues our Treasury collects. We cannot force foreign governments to treat their citizens as we would hope, but this amendment would make it much more difficult to hide the truth.”);
id.
at S3817-18 (May 17, 2010) (Statement of Senator Dodd) (“[C]ountries with huge revenue flows from energy development also frequently have some of the highest rates of poverty, corruption and violence. Where is all that money going? [Section 13(q)] is a first step toward addressing that issue by setting a new international standard for disclosure.”).

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

• “resource extraction issuer” means an issuer that is required to file an annual report with the Commission and engages in the commercial development of oil, natural gas, or minerals;
8

8
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;
9

9
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;
10

and

10
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 (“EITI”) (to the extent practicable), determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals.
11

11
15 U.S.C. 78m(q)(1)(C).

Section 13(q) specifies that “[t]o the extent practicable, the rules . . . shall support the commitment of the Federal Government to international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals.”
12

As noted above in the definition of “payment,” the statute explicitly refers to an international initiative, the EITI.
13

Although the separate provision in Section 13(q) about supporting the Federal Government's commitment to international transparency efforts does not explicitly mention the EITI,
14

the legislative history indicates that the EITI was considered in connection with the new statutory provision.
15

On March 19, 2014, the United States completed the process of becoming an EITI candidate country,
16

with its first mandatory report due within two years of the approval of its application.
17

In re-

proposing rules, we have considered the guidance in the EITI Standard and EITI Handbook on what should be included in a country's EITI plan,
18

as well as reports made by EITI member countries.

12
15 U.S.C. 78m(q)(2)(E).

13
The EITI is a voluntary coalition of oil, natural gas, and mining companies, foreign governments, investor groups, and other international organizations. The coalition was formed with industry participation and describes itself as being dedicated to fostering and improving transparency and accountability in resource-rich countries through the publication and verification of company payments and government revenues from oil, natural gas, and mining.
See
Implementing EITI for Impact—A Handbook for Policymakers and Stakeholders (2011) (“EITI Handbook”), at xii. A country volunteers to become an EITI candidate and must complete an EITI validation process to become a compliant member. Currently 49 countries are EITI implementing countries.
See https://eiti.org/countries/
(last visited Dec. 8, 2015). Of those, 31 have achieved “EITI compliant” status, four have their EITI status temporarily suspended, and the rest are implementing the EITI requirements but are not yet compliant.
Id.
Several countries not currently a part of the EITI have indicated their intention to implement the EITI.
See https://eiti.org/countries/other
(last visited Dec. 8, 2015).

14
15 U.S.C. 78m(q)(2)(E).

15

See, e.g.,
156 Cong. Rec. S3816 (daily ed. May 17, 2010) (Statement of Senator Lugar) (“This domestic action will complement multilateral transparency efforts such as the Extractive Industries Transparency Initiative—the EITI—under which some countries are beginning to require all extractive companies operating in their territories to publicly report their payments.”).

16
When becoming an EITI candidate, a country must establish a multi-stakeholder group, including representatives of civil society, industry, and government, to oversee implementation of the EITI. The stakeholder group for a particular country agrees to the terms of that country's EITI plan, including the requirements for what information will be provided by the governments and by the companies operating in that country. Generally, under the EITI, companies and the host country's government submit payment information confidentially to an independent administrator selected by the country's multi-stakeholder group, which is frequently an independent auditor. The auditor reconciles the information provided to it by the government and by the companies and produces a report. While the information provided in the reports varies among countries, the reports must adhere to the EITI requirements provided in the EITI Standard (2013).
See
the EITI's Web site at
http://eiti.org
(last visited Dec. 8, 2015).

17
In December 2012, the U.S. government established a multi-stakeholder group, the USEITI Advisory Committee, headed by the Department of

the Interior (“DOI”) and including the Departments of Energy and Treasury, as well as members of industry and civil society.
See
Multi-Stakeholder Group List of Members,
at http://www.doi.gov/eiti/FACA/upload/List-of-Members_03-16-15.pdf
. USEITI's current plans include producing its first report in December 2015, and producing its second report and submitting it to the EITI board in December 2016.
See
2015 Workplan—USEITI,
available at http://www.doi.gov/eiti/FACA/upload/WORKPLAN-2015-12_19_14-final.pdf
.
See also
letter from Department of Interior Office of Natural Resources Revenue (Nov. 6, 2015) (“DOI 1”).

18
The EITI Standard encompasses several documents fundamental to the EITI: (1) The “EITI Principles,” which set forth the general aims and commitments of EITI participants; (2) the “EITI Requirements,” which must be followed by countries implementing the EITI; (3) the “Validation Guide,” which provides guidance on the EITI validation process; (4) the “Protocol: Participation of Civil Society,” which provides guidance regarding the role of civil society in the EITI; and (5) documents relevant to the governance and management of the EITI (
e.g.,
the EITI Articles of Association, the EITI Openness Policy, and the draft EITI Code of Conduct). The EITI Handbook provides guidance on implementing the EITI, including overcoming common challenges to EITI implementation.

Pursuant to Section 13(q), the rules must require a resource extraction issuer to submit the payment information included in an annual report in an interactive data format
19

using an interactive data standard established by us.
20

Section 13(q) defines “interactive data format” to mean an electronic data format in which pieces of information are identified using an interactive data standard.
21

It also defines “interactive data standard” as a standardized list of electronic tags that mark information included in the annual report of a resource extraction issuer.
22

Section 13(q) also requires that the rules include electronic tags that identify, for any payments made by a resource extraction issuer to a foreign government or the Federal Government:

19
15 U.S.C. 78m(q)(2)(C).

20
15 U.S.C. 78m(q)(2)(D).

21
15 U.S.C. 78m(q)(1)(E).

22
15 U.S.C. 78m(q)(1)(F).

• The total amounts of the payments, by category;

• the currency used to make the payments;

• the financial period in which the payments were made;

• the business segment of the resource extraction issuer that made the payments;

• the government that received the payments and the country in which the government is located; and

• the project of the resource extraction issuer to which the payments relate.
23

23
15 U.S.C. 78m(q)(2)(D)(ii).

Section 13(q) further authorizes the Commission to require electronic tags for other information that we determine are necessary or appropriate in the public interest or for the protection of investors.
24

24

Id.

Section 13(q) requires, to the extent practicable, that the Commission make publicly available online a compilation of the information required to be submitted by resource extraction issuers under the new rules.
25

The statute does not define the term compilation.

25
15 U.S.C. 78m(q)(3).

Finally, Section 13(q) provides that the final rules “shall take effect on the date on which the resource extraction issuer is required to submit an annual report relating to the fiscal year . . . that ends not earlier than one year after the date on which the Commission issues final rules . . . .”
26

26
15 U.S.C. 78m(q)(2)(F).

B. The 2012 Rules and Litigation

We adopted final rules implementing Section 13(q) on August 22, 2012.
27

In October 2012, the American Petroleum Institute (“API”), the U.S. Chamber of Commerce, and two other industry groups challenged the 2012 Rules.
28

On July 2, 2013, the U.S. District Court for the District of Columbia vacated the rules.
29

The court based its decision on two findings: First, that the Commission misread Section 13(q) to compel the public disclosure of the issuers' reports; and second, the Commission's explanation for not granting an exemption for when disclosure is prohibited by foreign governments was arbitrary and capricious. On September 18, 2014, Oxfam filed suit in the U.S. District Court for the District of Massachusetts to compel the Commission to promulgate a final rule implementing Section 1504. Oxfam asked the court to compel the Commission to:

27
We received over 150 unique comment letters on the 2010 Proposing Release, as well as over 149,000 form letters (including a petition with 143,000 signatures). The letters, including the form letters designated as Type A, Type B, and Type C, are
available at http://www.sec.gov/comments/s7-42-10/s74210.shtml
. In addition, to facilitate public input on the Act before the official comment periods opened, the Commission provided a series of email links, organized by topic, on its Web site at
http://www.sec.gov/spotlight/regreformcomments.shtml
. The public comments we received on Section 1504 of the Act, which were submitted prior to the 2010 Proposing Release, are available on our Web site at
http://www.sec.gov/comments/df-title-xv/specialized-disclosures/specialized-disclosures.shtml
. Many commenters provided comments prior to, in response to, and after the 2010 Proposing Release. Comments received after the 2012 Adopting Release are
available at http://www.sec.gov/comments/df-title-xv/resource-extraction-issuers/resource-extraction-issuers.shtml
.

28

See
API et al. v. SEC, No. 12-1668 (D.D.C. Oct. 10, 2012). Petitioners also filed suit in the U.S. Court of Appeals for the D.C. Circuit, which subsequently dismissed the suit for lack of jurisdiction.
See
API v. SEC, 714 F. 3d 1329 (D.C. Cir. 2013).

29

See
API v. SEC, 953 F. Supp. 2d 5 (D.D.C., 2013) (“API Lawsuit”).

• Issue a proposed rule within 30 days of the granting of summary judgment in its favor or on August 1, 2015, whichever comes first;

• open a 45-day period for public notice and comment; and

• promulgate a final rule within 45 days after the end of said period, with the final rule promulgated no later than November 1, 2015.

On September 2, 2015, the court issued an order holding that the Commission unlawfully withheld agency action by not promulgating a final rule.
30

The court concluded that despite the earlier adoption of final rules and vacatur by the U.S. District Court for the District of Columbia, “the duty to promulgate a final extraction payments disclosure rule remains unfulfilled more than four years past Congress's deadline.” The Commission filed an expedited schedule for promulgating the final rule with the court on October 2, 2015. Pursuant to that proposed expedited schedule, the Commission would vote on the adoption of a final rule in June 2016.
31

30

See
Oxfam America, Inc. v. United States Securities and Exchange Commission, Civil Action, No. 14-13648 (DJC), 2015 WL 5156554 (D. Mass. Sept. 2, 2015).

31
In the Notice of Proposed Expedited Rulemaking Schedule, the Commission also advised the court of several factors that may result in variation from the proposed expedited schedule. These factors include the overall volume of the Commission's work, the Commission's inability to guarantee a favorable vote from a majority of its Commissioners, and the possibility that exigencies may arise that may make it impracticable for the Commission to meet the proposed deadline (
e.g.,
a government shut-down, relevant international developments, unexpected relevant legal developments).

C. Developments Subsequent to the 2013 Court Decision

Since the U.S. District Court for the District of Columbia's decision in 2013, the European Parliament and Council of the European Union have adopted two directives that include payment disclosure rules similar to the 2012 Rules.
32

The EU Accounting Directive

and the EU Transparency Directive (the “EU Directives”) determine the baseline requirements for oil, gas, mining, and logging companies to disclose annually the payments they make to governments on a by country and by project basis.
33

The EU Accounting Directive regulates the provision of financial information by all “large” companies
34

incorporated under the laws of a European Economic Area (“EEA”) member state.
35

It requires covered oil, gas, mining, and logging companies to disclose specified payments to governments. The EU Transparency Directive applies these disclosure requirements to all companies listed on EU-regulated markets
36

even if they are not registered in the EEA or are incorporated in other countries.
37

The EU Directives determine the applicability and scope of the requirements and set the baseline for what has to be reported in each member country. Member states are, however, granted some leeway for when the report is due and what penalties will result from violations of the regulations.
38

Companies' required public disclosure of payments in an annual report is anticipated to begin in 2016 in all European Union and EEA member states once the essential provisions have been effectively incorporated into domestic law in each country.
39

32
Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings (“EU Accounting Directive”); and Directive 2013/50/EU of the European Parliament and of the Council of 22 October 2013 amending Directive 2004/109/EC on transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, Directive 2003/71/EC of the

European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading and Commission Directive 2007/14/EC on the implementation of certain provisions of Directive 2004/109/EC (the “EU Transparency Directive”).

33
Unlike the 2012 Rules and the proposed rules, the EU Directives also apply to companies active in the logging of primary forests.

34

See
Article 3(4) of the EU Accounting Directive, which defines large companies (“large undertakings”) to mean those which on their balance sheet dates exceed at least two of the three following criteria: (a) Balance sheet totaling €20 million (approximately $21.4 million (USD) as of Nov. 10, 2015); (b) net turnover of €40 million (approximately $42.8 million (USD) as of Nov. 10, 2015); and (c) average number of employees of 250. Neither the 2012 rules nor the proposed rules have a size limitation.

35
The EEA is composed of the EU Member states plus Iceland, Liechtenstein and Norway.

36
The term “regulated market” is defined in the EU's Markets in Financial Instruments Directive 2004/39/EC (“MiFID”), as amended by 2010/78/EU. The list of regulated markets can be found on the European Securities and Markets Authority's Web site at
http://mifiddatabase.esma.europa.eu/Index.aspx?sectionlinks_id=23&language=0&pageName=REGULATED_MARKETS_Display&subsection_id=0&action=Go&ds=8&ms=9&ys=2015&mic_code=MIC%20Code&full_name=Full%20Name&cpage=0
(last visited Dec. 8, 2015).

37

See
EU Transparency Directive, Art. 2(1)(d) and Art. 6.

38

See, e.g.,
Article 45 of the EU Accounting Directive (“The report . . . on payments to governments shall be published as laid down by the laws of each Member State . . . .”);
Id.
at Article 51 (“Member States shall provide for penalties applicable to infringements of the national provisions adopted in accordance with this Directive . . . .”).

39
The requirements of the EU Directives are implemented through the enacting legislation of each EU Member State. The deadlines for implementing the EU Accounting Directive and the EU Transparency Directive are July 20, 2015 and November 26, 2015 respectively. In general, non-EU EEA countries enact implementing legislation after an EU Directive is adopted into the EEA by Joint Committee decision. The EEA Joint Committee adopted the Accounting Directive on October 30, 2015 and the Transparency Directive is awaiting decision (as of November [6], 2015). As of November [6], 2015, Austria, Croatia, the Czech Republic, Denmark, Germany, Hungary, Italy, Lithuania, Portugal, Slovakia, Spain, and the United Kingdom have filed notifications of full transposition of the Accounting Directive with the European Commission. Norway, a non-EU member of the EEA, has adopted legislation that complies with both the Accounting and Transparency Directives, effective for fiscal years beginning on or after January 1, 2014. Other EU and EEA member countries are working towards implementation.

The EU Directives are similar to the 2012 Rules in that they require disclosure of the same payment types on a per project and per government basis and do not provide any exemption from the disclosure requirements. Further, each of these regulations also requires public disclosure of payment information, including the issuer's identity. There are, however, significant differences from the 2012 Rules. One difference is that the EU Directives define the term “project,”
40

whereas the 2012 Rules left this term undefined.
41

Another difference is that the EU Directives allow issuers to use reports prepared for foreign regulatory purposes to satisfy their disclosure obligations under EU law if those reports are deemed equivalent pursuant to specified criteria while the 2012 Rules do not contain such a provision.
42

40

See, e.g.,
Article 41(4) of the EU Accounting Directive.

41
The Commission did not define the term “project” in the 2012 Rules, but it did provide guidance on its meaning in the 2012 Adopting Release, stating that “resource extraction issuers routinely enter into contractual arrangements with governments for the purpose of commercial development of oil, natural gas, or minerals. The contract defines the relationship and payment flows between the resource extraction issuer and the government, and therefore, we believe it generally provides a basis for determining the payments, and required payment disclosure, that would be associated with a particular `project'.” 2012 Adopting Release at 85-86 [77 FR 56385].

42

See, e.g.,
Article 46-7 of the EU Accounting Directive. Another significant difference is that the EU Directives cover logging activities in addition to the extractive industry.
See, e.g.,
Article 42(1) of the EU Accounting Directive (“Member States shall require . . . entities active in the extractive industry or the logging of primary forests to prepare and make public a report on payments made to governments on an annual basis.”).

Canada also has adopted a federal resource extraction disclosure law, the Extractive Sector Transparency Measures Act (“ESTMA”), which is similar to the 2012 Rules.
43

ESTMA, like the EU Directives, allows for the Minister of Natural Resources Canada to determine that the requirements of another jurisdiction are an acceptable substitute for the domestic requirements.
44

For example, on July 31, 2015 the Minister determined that the reporting requirements in the EU Directives were an acceptable substitute for Canada's requirements under ESTMA.
45

The draft guidance and technical reporting specifications under ESTMA also include project-level reporting using the same definition as the EU Directives.
46

Unlike the EU Directives and the 2012 Rules, which did not provide for any exemptions unique to resource extraction payment disclosure, ESTMA authorizes the adoption of regulations respecting, among other matters, “the circumstances in which any provisions of this Act do not apply to entities, payments or payees.”
47

As of the date of this release, the Minister of Natural Resources Canada has not authorized any regulations pursuant to that provision that provide for exemptions under ESTMA.

43

See
Extractive Sector Transparency Measures Act, 2014 S.C., ch. 39, s. 376 (Can.), which came into force on June 1, 2015.

44

See
ESTMA, Section 10(1) (“If, in the Minister's opinion, and taking into account any additional conditions that he or she may impose, the payment reporting requirements of another jurisdiction achieve the purposes of the reporting requirements under this Act, the Minister may determine that the requirements of the other jurisdiction are an acceptable substitute . . . .”).

45
Extractive Sector Transparency Measures Act—Substitution Determination,
available at http://www..gc.ca/acts-regulations/17754
(last visited Dec. 8, 2015).

46

See
draft Extractive Sector Transparency Measures Act—Guidance (“ESTMA Guidance”). The Minister of Natural Resources of Canada has recommended the adoption of a definition of project that is identical to the EU Directives' definition of project.
See
Natural Resources Canada,
Extractive Sector Transparency Measures Act-Technical Reporting Specifications,
§ 2.2.2 (Aug. 1, 2015),
available at http://www.nrcan.gc.ca/sites/.nrcan.gc.ca/files/pdf/estma/Technical_Reporting_Specifications_EN.pdf
. Although the ESTMA Guidance is currently in draft form, we assume for purposes of this proposal that it and the related draft ESTMA—Technical Reporting Specifications (“ESTMA Specifications”) will be finalized in substantially similar form prior to the effective date of our final rules under Section 13(q). We will continue to evaluate any developments in the ESTMA Guidance, ESTMA Specifications, and their impact on our approach prior to the adoption of our final rules.

47

See
ESTMA, Section 23(1).

In addition to the developments in the European Union and Canada, which govern a large percentage of the companies that would be impacted by

our proposed rules,
48

there have been significant developments in the EITI's approach since the 2012 Rules. In the 2012 Adopting Release, we noted that the EITI's approach at the time was fundamentally different from Section 13(q) in that companies would generally submit payment information confidentially to an independent administrator selected by the country's multi-stakeholder group who then used that information to produce a report.
49

That report could have presented aggregated data if the multi-stakeholder group approved of such presentation. Since then, in order to elicit more intelligible, comprehensive, reliable, and accurate information,
50

the EITI has revised its standard to require the report to include payment disclosure by each company, rather than aggregated data, and project level disclosure if consistent with the EU and Commission rules.
51

48

See
Section III.B.2.b below for our estimate of the number of companies that would be fully affected by the proposed rules.

49

See
2012 Adopting Release, n.27 and accompanying text.

50

See
History of EITI (“The Board undertook an extensive strategy review to address . . . [h]ow to ensure that the EITI provided more intelligible, comprehensive and reliable information . . . . The resulting EITI Standard . . . therefore sought . . . [b]etter and more accurate disclosure . . . .”)
available at https://eiti.org/eiti/history
(last visited Dec. 8, 2015).

51

See
EITI Standard, at 6, 31.

Since the 2012 Rules were vacated, numerous parties have also submitted comment letters to the Commission and have met with members of the Commission or the staff.
52

These commenters provided recommendations on how the Commission could structure the rules required by Section 13(q) in light of the U.S. District Court for the District of Columbia's decision and the international developments described above. Through this process, the Commission also has become aware that a number of extractive industry companies around the world have voluntarily undertaken to make detailed disclosures of their resource extraction payments to foreign governments.
53

We have reviewed and considered the comments received and the rules we are proposing reflect such consideration.

52
Copies of the letters and meeting memoranda relating to these matters are
available at http://www.sec.gov/comments/df-title-xv/resource-extraction-issuers/resource-extraction-issuers.shtml
.

53

See, e.g.,
letters from Kosmos Energy (Oct. 19, 2015) (“Kosmos”); Statoil ASA (Feb. 22, 2011) (“Statoil”); and Columbia Center on Sustainable Investment (Oct. 30, 2015).
See also
BHP Billiton, Economic Contribution and Payments to Governments Report 2015
available at http://www.bhpbilliton.com/~/media/bhp/documents/investors/annual-reports/2015/bhpbillitoneconomics2015.pdf?la=en
.

D. Summary of Proposed Rules

In general, the proposed rules, which are described in more detail in Part II below, would require resource extraction issuers to file a Form SD on an annual basis that includes information about payments related to the commercial development of oil, natural gas, or minerals that are made to governments. The following are the key provisions of the proposed rules:

• The term “resource extraction issuer” would apply to all U.S. companies and foreign companies that are required to file annual reports pursuant to Section 13 or 15(d) of the Exchange Act and are engaged in the commercial development of oil, natural gas, or minerals.

• The term “commercial development of oil, natural gas, or minerals” would mean exploration, extraction, processing, and export, or the acquisition of a license for any such activity, consistent with Section 13(q).

• The term “payment” would mean payments that are made to further the commercial development of oil, natural gas, or minerals, are “not de minimis,” and includes taxes, royalties, fees (including license fees), production entitlements, and bonuses, consistent with Section 13(q). We also propose including dividends and payments for infrastructure improvements in the definition. In addition, we propose defining “not de minimis” to mean any payment, whether a single payment or a series of related payments, that equals or exceeds $100,000 during the most recent fiscal year.

• In addition to the payments it makes directly, a resource extraction issuer would be required to disclose payments made by its subsidiaries and other entities under its control. An issuer would disclose those payments that are included in its consolidated financial statements made by entities that are consolidated or proportionately consolidated, as determined by applicable accounting principles.

• The term “project” would be defined. We propose to define it in a manner similar to the EU Directives, using an approach focused on the legal agreement that forms the basis for payment liabilities with a government. In certain circumstances this definition would also include operational activities governed by multiple legal agreements.

• The term “foreign government” would mean a foreign national government as well as a foreign subnational government, such as the government of a state, province, county, district, municipality, or territory under a foreign national government, consistent with Section 13(q).

• The term “Federal Government” would mean the United States Federal Government.

• The proposed rules would require a resource extraction issuer to file its payment disclosure on Form SD, on the Commission's Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”), no later than 150 days after the end of its fiscal year. Form SD would require issuers to include a brief statement directing users to detailed payment information provided in an exhibit.

• Recognizing the discretion granted to us under Section 13(q), the proposed rules would require issuers to disclose the payment information publicly, including the identity of the issuer.

• The proposed rules would not include any express exemptions. Instead, resource extraction issuers could apply for, and the Commission would consider, exemptive relief on a case-by-case basis.
54

54

See
Sections 12(h) and 36(a) of the Exchange Act (15 U.S.C. 78
l
(h) and 78mm(a)).

• In light of recent developments in the European Union and Canada, as well as the developments with the U.S. Extractive Industries Transparency Initiative (“USEITI”), Form SD would include a provision by which resource extraction issuers could use a report prepared for foreign regulatory purposes or for USEITI to comply with the proposed rules if the Commission deems the foreign jurisdiction's applicable requirements or the USEITI reporting regime to be substantially similar to our own.

• Resource extraction issuers would be required to present the payment disclosure using the eXtensible Business Reporting Language (“XBRL”) electronic format and the electronic tags identified in Item 2.01 of Form SD. These tags would include those listed in Section 13(q), as well as tags for the type and total amount of payments made for each project, the type and total amount of payments made to each government, the particular resource that is the subject of commercial development, and the subnational geographic location of the project.

• Resource extraction issuers generally would be required to comply with the rules starting with their fiscal year ending no earlier than one year after the effective date of the adopted rules.

E. Objectives of Section 13(q)'s Required Disclosures and the Proposed Rules

Section 13(q) reflects U.S. foreign policy interests in supporting global efforts to improve the transparency of payments made in the extractive industries. The use of securities law disclosure requirements to advance foreign policy objectives is uncommon, and therefore foreign policy is not a topic we routinely address in our rulemaking.
55

Nonetheless, because Congress has directed the Commission to issue rules effectuating Section 13(q), we have sought to understand the governmental interests that the statute and rules are designed to serve, and to determine the best way to structure our rules so as to further those governmental interests.

55
In this regard, we note that there are only two other Federal securities law disclosure requirements that appear designed primarily to advance U.S. foreign policy objectives. The first is Section 13(p) of the Exchange Act [15 U.S.CM 78m(p)], which was added in 2010 by the Act. Section 13(p) directs the Commission to adopt rules requiring certain disclosures regarding the use of conflict minerals originating in the Democratic Republic of the Congo. The other disclosure provision is Section 13(r) of the Exchange Act [15 U.S.C. 78m(r)], which was added by the Iran Threat Reduction and Syria Human Rights Act of 2012. Section 13(r) is a self-executing provision that requires a reporting company to include in its annual and quarterly reports disclosure about specified Iran-related activities, and transactions or dealings with persons whose property and interests are blocked pursuant to two Executive Orders relating to terrorism and the proliferation of weapons of mass destruction. Public Law 112-158 (Aug. 10, 2012).

Accordingly, we have carefully examined the legislative history, relevant materials from the Executive Branch, and the many comments we have received, in order to develop our understanding of the objectives of Section 13(q). To assist us further in understanding the governmental interests, Commission staff consulted with relevant staff from the Department of State, the Department of the Interior, and the U.S. Agency for International Development.
56

Commission staff also conferred with representatives from the Canadian and British governments, as well as a representative of the European Union. As outlined below, these sources and consultations have helped form our view that Section 13(q) and the rules required thereunder are intended to advance the important U.S. foreign policy objective of combatting global corruption and, in so doing, to potentially improve accountability and governance in resource-rich countries around the world.
57

In light of our understanding, the disclosure that we are proposing to require of resource extraction issuers (
i.e.,
company specific, project-level, public disclosure of information relating to payments made to a foreign government for the purpose of the commercial development of oil, natural gas, or minerals) is designed to further these critical U.S. interests.

56

See
Section 13(q)(2)(B) (expressly authorizing the Commission in developing the rules under Section 13(q) to “consult with any agency or entity that the Commission determines is relevant”).

57

See, e.g.,
letters from United States Department of State (Nov. 13, 2015) (“State Department”) (“[Section 13(q)] directly advances the United States' foreign policy interests in increasing transparency and reducing corruption in the oil, gas, and mineral sectors.”); DOI 1.

1. The U.S. Government's Foreign Policy Interest in Reducing Corruption in Resource-Rich Countries

An important component of the U.S. foreign policy agenda is “to stem corruption around the world and hold to account those who exploit the public's trust for private gain.”
58

Indeed, “[t]he United States has been a global leader on anti-corruption efforts since enacting the first foreign bribery law, the Foreign Corrupt Practices Act (FCPA), in 1977.”
59

For example, “[t]he United States was a leader in developing fundamental international legal frameworks [to combat corruption] such as the UN Convention against Corruption and the Organization for Economic Cooperation and Development (OECD) Anti-Bribery Convention[.]”
60

And “[t]he United States has also been a leader in providing funding for capacity building to fight corruption and promote good governance.”
61

58
The White House, Fact Sheet: The U.S. Global Anticorruption Agenda (Sept. 24, 2014) (“White House Fact Sheet”)
available at https://www.whitehouse.gov/the-press-office/2014/09/24/fact-sheet-us-global-anticorruption-agenda
(“Preventing corruption preserves funds for public revenue and thereby helps drive development and economic growth. By contrast, pervasive corruption siphons revenue away from the public budget and undermines the rule of law and the confidence of citizens in their governments, facilitates human rights abuses and organized crime, empowers authoritarian rulers, and can threaten the stability of entire regions.”).
See also
letter from State Department (“Efforts to promote transparency and good governance, and combat corruption are at the forefront of the [State] Department's diplomatic and development efforts.”).

59
White House Fact Sheet.
See also
Press Statement, Secretary of State John Kerry, U.S. Welcomes International Anticorruption Day (Dec. 9, 2014) (“Kerry Statement”)
available at http://www.state.gov/secretary/remarks/2014/12/234873.htm
(“[T]he United States is using a variety of tools, including bilateral diplomacy, multilateral engagement, enforcement, and capacity building assistance, to advance our anticorruption agenda.”); Secretary of State Hillary Rodham Clinton, Speech at the Transparency International-USA's Annual Integrity Award Dinner (Mar. 22, 2012) (“Clinton Transparency Speech”) (describing how the United States has “made it a priority to fight corruption and promote transparency”).

60
White House Fact Sheet.
See generally
OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Dec. 17, 1997)
available at http://www.oecd.org/daf/anti-bribery/ConvCombatBribery_ENG.pdf
.

61
White House Fact Sheet.
See also
Kerry Statement (“[W]e renew our notice to kleptocrats around the world: Continued theft from your communities will not be tolerated . . . .”); Clinton Transparency Speech (stating that “[c]orruption is a key focus of our strategic dialogue with civil society”); Staff of Senate Committee on Foreign Relations, 110th Cong., The Petroleum and Poverty Paradox, at 17 (Oct. 2008) (“Senate Report”) (“One of the five `key objectives' of U.S. foreign assistance is to ensure that recipient countries are `governing justly and democratically,' which for developing countries means that foreign aid is directed to `support policies and programs that accelerate and strengthen public institutions and the creation of a more vibrant local government, civil society, and media.”).
See generally
The White House, Fact Sheet: Leading the Fight Against Corruption and Bribery (Nov. 11, 2014)
available at https://www.whitehouse.gov/the-press-office/2014/11/11/fact-sheet-leading-fight-against-corruption-and-bribery
) (“The United States continues to lead in providing funding for capacity building to fight corruption and promote good governance.”).

One area of particular concern for the U.S. Government is corruption within the governments of developing countries that are rich in oil, gas, or minerals.
62

Indeed, it has been explained that “[h]igher levels of corruption present the most obvious political risk that can arise from large holdings of natural resources. The short run availability of large financial assets [
i.e.,
revenues from natural resources] increases the opportunity for the theft of such assets by political leaders.”
63

62

See, e.g.,
White House Fact Sheet (explaining that “the United States is taking several actions to ensure that extractives companies and governments remain accountable”); letter from State Department (“Efforts to increase transparency have been a high priority for this Administration as part of the United States' good governance promotion, anti-corruption, and energy security strategies.”).
See also
Testimony of Secretary Hillary Rodham Clinton, Senate Foreign Relations Committee Hearing on National Security and Foreign Policy Priorities in the FY 2013 International Affairs Budget (Feb. 28, 2012) (explaining that “everybody is benefited by the disinfectant of sunshine and the spotlight to hold institutions accountable” and the Section 13(q) disclosures “complement[] other efforts at transparency that [the U.S. Government is] committed to”); Senate Report, at 17 (“[I]n the summer of 2008, the State Department, under a provision of the FY2008 State appropriations bill, issued new guidance to embassies to revoke or deny visas to high-level foreign officials involved in extractive industries corruption.”).

63
Maccartan Humphreys, Jeffrey D. Sachs & Joseph E. Stiglitz, Escaping the Resource Curse (2007), at 11 (“Escaping the Resource Curse”).
See also,
Simon Dietz, Eric Neumayer, & Indra de Soysa,
Corruption, the Resource Curse, and Genuine Saving, Environment Development Economics
(2007) (noting that “[t]he availability of resource rents may give rise to corruption”).
See generally
Senate Report, at 12 (explaining that “transparency in extractive industries abroad is in [U.S.] interests because mineral wealth breeds corruption, which dulls the effects of U.S. foreign assistance”); Escaping the Resource Curse, at 11 (noting that “statistical studies that seek to account for variation in levels of corruption across different countries

find that natural resource dependence is a strong predictor”); Global Witness,
Oil Revenue Transparency
(Mar. 2007) (“In all, 26 of the world's 36 oil-rich countries rank among the bottom half of the world's most corrupt countries.”); letter from Civil Society Coalition on Oil and Gas in Uganda (May 18, 2015) (“CSCU”) (explaining that revenues from extractive activities are a “major vector for corruption and malfeasance in the extractive sectors”).

The costs of such corruption to the national economies of these resource-rich developing countries can be “enormous.”
64

Many experts and policymakers in this area contend that such corruption “is central to explaining why resource-rich countries perform badly in terms of socio-economic development, a phenomenon that has been termed the resource curse.”
65

The State Department has similarly explained that “[c]orruption and mismanagement of these resources can impede economic growth, reduce opportunities for U.S. trade and investment, divert critically needed funding from social services and other government activities, and contribute to instability and conflict.”
66

Whatever form the relationship between corruption and the resource curse may take in a given resource-rich developing country, many believe that the two are closely connected.
67

64
Escaping the Resource Curse, at 11.

65
Ivar Kolstad and Arne Wiig,
Is Transparency the Key to Reducing Corruption in Resource Rich Countries?
World Development (Feb. 2009).
See also,
Simon Dietz, Eric Neumayer, & Indra de Soysa,
Corruption, the Resource Curse, and Genuine Saving,
Environment Development Economics (2007) (discussing the “persuasive theoretical and empirical arguments in the literature that suggest corruption may be a major explanatory factor in the resource curse”); Carles Leite & Jens Weidmann,
Does Mother Nature Corrupt? Natural Resources, Corruption, and Economic Growth,
IMF (July 1999) (discussing a regression analysis demonstrating that “long-term growth is negatively affected by the level of corruption”); Senate Report, at 10 (“The resource curse is the product of multiple factors including . . . [i]ncreases in incentives for corruption and political rent-seeking when large commodity revenue streams are available[.]”).
See generally
Escaping the Resource Curse, at 1 (“Countries with large endowments of natural resources, such as oil and gas, often perform
worse
in terms of economic development and good governance than do countries with fewer resources. Paradoxically, despite the prospects of wealth and opportunity that accompany the discovery and extraction of oil and other natural resources, such endowments all too often impede rather than further balanced and sustainable development.”) (emphasis in original); Bank Information Center & Global Witness,
Assessment of IMF and World Bank Group Extractive Industries Transparency Implementation
(Oct. 2008) (“[M]any resource-rich countries are among the most corrupt and the poorest countries in the world.”).

66
Letter from State Department.

67
At least one potential explanation for the relationship between resource-revenue corruption and poor socio-economic performance is that resource revenues tend to “produce weak state structures that make corrupt practices considerably easier for government officials.” Escaping the Resource Curse, at 11. The weak state structures, in turn, may result from the fact that “resource-rich governments receive so much revenue from rents that they have little need for taxation” and, therefore, can operate in a manner that is less accountable to the general public. Caitlin C. Corrigan,
Breaking the Resource Curse: Transparency in the Natural Resource Sector and the Extractive Industries Transparency Initiative,
Resource Policy (2014). It has been argued that “[s]uch governments have lower motivation to push through development enhancing proposals or remain democratic.”
Id. See generally
Escaping the Resource Curse, at 257 (“Simply stated, petroleum dependence turns oil states into `honey pots'—ones to be raided by all actors, foreign and domestic, regardless of the long-term consequences produced by this collective rent-seeking.”).

In recent years, a global consensus has begun to emerge that increasing revenue transparency through the public disclosure of revenue payments made by companies in the resource extraction sector to foreign governments can be an important tool to help combat the corruption that resource-rich developing countries too often experience.
68

For example, as discussed above, since 2002 an international coalition that includes various foreign governments, international organizations, and resource extraction issuers has maintained the EITI, which seeks to improve public transparency and accountability in countries rich in oil, natural gas, or minerals.
69

As also discussed above, the European Union and Canada have both enacted resource extraction payment disclosure requirements.
70

Moreover, the World Bank requires “revenue transparency as a condition on new investments in [extractive industries].”
71

The International Monetary Fund similarly seeks to promote such transparency in developing countries.
72

68

See, e.g.,
letter from State Department (explaining that transparency has been “widely identified as a key component of the fight against corruption in this sector”); Liz David-Barrett & Ken Okamura,
The Transparency Paradox: Why Do Corrupt Countries Join EITI?
Working Paper No. 38, European Research Centre for Anti-Corruption and State-Building (Nov. 2013) (explaining that transparency initiatives “have become a key part of the anti-corruption toolkit on the assumption that sunlight is the best disinfectant”); Alexandra Gillies & Antoine Heuty,
Does Transparency Work? The Challenges of Measurement and Effectiveness in Resource-Rich Countries,
6 Yale J. Int'l Aff. 25 (2011) (“Transparency has emerged as the most broadly recommended policy response to poor governance records in resource-rich states and their damaging developmental effects.”).
See also
Escaping the Resource Curse, at 26 (“The central problem facing resource-rich countries may be easily stated: Various individuals wish to divert as much of that endowment as possible for their own private benefit. Modern economic theory has analyzed the generic problem of inducing agents (here government officials) to act in the interests of those they are supposed to serve (the principals, here the citizens more generally). Agency problems arise whenever information is imperfect, and hence there is a need to emphasize
transparency,
or improving the openness and availability of information in an attempt to control corruption.”) (emphasis in original).

69

See
Senate Report, at 14 (describing as “[k]ey EITI goals” the “prevent[ion] [of] revenue-related corruption” and the “promotion [of] public fiscal transparency and political accountability”).

70
Another example of an international transparency effort is the amendments to the Hong Kong Stock Exchange listing rules for mineral companies.
See
Amendments to the GEM Listing Rules of the Hong Kong Stock Exchange, Chapter 18A.05(6)(c) (effective June 3, 2010),
available at http://www.hkex.com.hk/eng/rulesreg/listrules/gemrulesup/Documents/gem34_miner.pdf
(requiring a mineral company to include in its listing document, if relevant and material to the company's business operations, information regarding its compliance with host country laws, regulations and permits, and payments made to host country governments in respect of tax, royalties, and other significant payments on a country by country basis).

71
World Bank,
Striking a Better Balance—the World Bank Group and Extractive Industries: The Final Report of the Extractive Industries Review
(Sept. 17, 2004).

72

See
IMF,
Guide on Resource Revenue Transparency
(2007) (“A high immediate priority should be given to improving the quality and public disclosure of data on resource revenue transactions . . . .The public availability of information on all resource-related transactions is central to fiscal transparency.”).
See generally
Senate Report, at 3 (“The World Bank and the International Monetary Fund have both launched efforts to improve accounting and transparency of extractive industry revenues, and to make it harder for government officials to hide corruption—and easier for citizens to demand that the money be spent wisely.”).

In accordance both with the U.S. Government's long-standing foreign policy objective to reduce global corruption and with the increased appreciation that resource extraction payment transparency may help combat corruption, Congress in 2010 enacted the Section 13(q) public disclosure requirement.
73

Section 13(q) directly

embodies this governmental purpose, providing expressly that “[t]o the extent practicable, the rules issued [under the provision] shall support the commitment of the Federal Government to international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals.”
74

The legislative history underlying the enactment of Section 13(q) further confirms that the provision was intended to help combat corruption by increasing public transparency of resource extraction payments and, in so doing, to potentially enhance accountability and governance in resource-rich developing countries.
75

And since the enactment of Section 13(q), the President and the State Department have emphasized the important role that disclosure pursuant to Section 13(q) is intended to have in helping to combat corruption in resource-rich countries.
76

73
The legislative history demonstrates that, by at least 2008, Congress became aware that a mandatory disclosure regime was needed to complement the voluntary EITI regime to achieve significant international gains in payment transparency.
See, e.g.,
Transparency of Extractive Industries: High Stakes for Resource-Rich Countries, Citizens, and International Business, Hearing before the Committee on Financial Services, U.S. House of Representatives (No. 110-75) (Oct. 25, 2007) at 7 (testimony of Ian Gary) (“EITI may make progress in some countries where political will to tackle the problem is strong and lasting, and requires the active involvement of civil society. But the initiative is weakened by its voluntary nature and will not capture many countries where problems are most severe.”). As explained in a 2008 Senate Foreign Relations Committee report:

United States and multilateral efforts to promote extractive industries transparency are intended to work within the bounds of the political will and technical capacity of the resource-rich countries. With their revenue windfall, some of these nations are increasingly intransigent in resisting outside pressure. This has led some to urge that the U.S. should take steps domestically to promote transparency overseas, much as the Foreign Corrupt Practices Act was U.S. domestic legislation to thwart corruption abroad. One such proposal is to mandate revenue reporting for companies listed with the Securities and Exchange Commission and working in extractives abroad.

Senate Report, at 20. This report's findings served as the basis for Section 13(q).
See
156 Cong. Rec.

S3816 (May 17, 2010) (Statement of Senator Lugar) (explaining that Section 13(q) “builds on the findings” of this report);
id.
at S3817 (May 17, 2010) (Statement of Senator Dodd).
See also id.
S3818 (May 17, 2010) (Statement of Senator Dodd) (stating that “broad new requirements for greater disclosure by resource extractive companies operating around the world[ ] would be an important step” to complement the EITI's “voluntary program”).

74
Section 13(q)(2)(E).

75

See, e.g.,
156 Cong. Rec. S3816 (May 17, 2010) (Statement of Senator Lugar) (explaining that the provision will help combat the problem where “[t]oo often, oil money intended for a nation's poor ends up lining the pockets of the rich or is squandered on showcase projects instead of productive investments”);
id.
at S3976 (May 19, 2010) (Statement of Senator Feingold) (explaining that the provision will “require companies listed on U.S. stock exchanges to disclose in their SEC filing extractive payments made to foreign governments for oil, gas, and mining . . . . This information would then be made public, empowering citizens in resource-rich countries in their efforts to combat corruption and hold their governments accountable.”);
id.
at S5913 (July 15, 2010) (Statement of Senator Leahy) (“[Section 13(q)] will enable citizens of these resource-rich countries to know what their governments and governmental officials are receiving from foreign companies in exchange for mining rights. This will begin to hold governments accountable for how those funds are used and help ensure that the sale of their countries' natural resources are used for the public good.”). We note that the legislative history also indicates that Congress intended for the Section 13(q) disclosures to serve as a potential informational tool for investors.
See, e.g., id.
at 3316 (Statement of Senator Cardin) (May 6, 2010) (“The investor has a right to know about the payments. Secrecy of payments carries real bottom-line risks for investors.”).

76

See, e.g.,
President Barack Obama,
Speech Before the United Nations General Assembly
(Sept. 22, 2010) (“So we are leading a global effort to combat corruption, which in many places is the single greatest barrier to prosperity, and which is a profound violation of human rights. That's why we now require oil, gas and mining companies that raise capital in the United States to disclose all payments they make to foreign governments.”); letter from State Department (recommending that the Commission “produce a strong [Section 13(q)] rule that improves transparency by ensuring a sufficiently detailed level of information concerning payments from the extractive industry to foreign governments for the development of oil, natural gas, and mineral” that would be “made public and accessible to civil society”);
id.
(“A strong [Section 13(q) rule would complement [the U.S. Government's anti-corruption] efforts, bolster our credibility with foreign partners on these issues, and promote U.S. foreign policy interests. It is important the United States lead by example by modeling strong transparency legislation and rulemaking.”); Clinton Transparency Speech (stating that Section 13(q) should “have a very profound effect on [the U.S. Government's] ability to try to manage some of the worst practices that we see in the extractive industry and in the relationships with governments at local and national levels around the world”).

2. Reasons for Proposing Issuer-Specific, Project-Level, Public Disclosures of Resource Extraction Payments

Given the important governmental interests underlying Section 13(q) and this rulemaking, we have considered the manner in which the public disclosure of resource extraction payments might best promote those governmental interests. As detailed in Section II of this release, we are proposing a requirement for company-specific, project-level, public disclosure. By “project-level” reporting, we refer to “project” as defined by our proposed rules—a definition that is generally based on the operational activities that are governed by a single contract, license, lease, concession or similar legal agreement and that forms the basis for payment liabilities.
77

We believe that such company-specific, project-level payment transparency is potentially beneficial and that our proposal to require such disclosure is properly designed to further the goal of combatting corruption.

77

See
Section II.E below. Our definition is generally comparable to the “project” definition that the European Union has adopted and that Canada is considering adopting. We note that the State Department has advised that a Commission rule “compatible with” the EU and Canadian “transparency measures would further advance the United States' foreign policy interests.” Letter from State Department. Some commenters have argued for a much broader definition of project that would encompass vast expanses of territory in many instances, but as we explain immediately below and in Section II.E, the more granular definition contained in the proposed rules would provide greater payment transparency and better serve the statutory objectives.
See generally
letter from Iraqi Transparency Alliance for Extractive Industries (Sept. 28, 2015) (“Iraqi Transparency Alliance”) (explaining that “EITI data in Iraq is reported by field, but some fields are enormous,” such as the “Rumaila field—a super-giant oil field, covering around 700 [square miles], with around 270 production wells in operation, producing around 1.3 m barrels per day,” and stating that “[w]ithout project-level information, [Iraqi citizens] cannot see the detailed roles that individual companies are playing in the region and whether Iraqi citizens are seeing the appropriate benefits from the extraction”).

Scholars and other experts have noted that “[t]he extractive sector presents particularly strong asymmetries of information across the principal stakeholders: Citizens, governments, and companies.”
78

While resource extraction companies are aware of the payments that they make and government actors may be aware of the revenues that they receive, too often “[t]he citizens of resource-rich countries have very little information about the extractive industry-related activities in which their government engages.”
79

This has been described as “a formula for corruption.”
80

78
Alexandra Gillies & Antoine Heuty,
Does Transparency Work? The Challenges of Measurement and Effectiveness in Resource-Rich Countries,
6 Yale J. Int'l Aff. 25 (2011).
See also
156 CONG. REC. S3817 (May 17, 2010) (Statement of Senator Dodd) (explaining that in many resource-rich countries “governance and accountability systems are rudimentary, at best,” and “corruption, secrecy, and a lack of transparency regarding public finance are pervasive”).
See generally
Gillies & Heuty (“This uneven allocation [of information] reflects the centralization of power and control of the petroleum and mineral sectors that commonly occurs in developing countries.”).

79
Escaping the Resource Curse, at xiv.
See also
Gillies & Heuty (“Media, parliaments, civil society, the population, opposition parties, and other outsiders often have very limited access to information, which constrains their ability to exercise their oversight and accountability functions.”).
See also
letters from Iraqi Transparency Alliance (“While EITI data is certainly an improvement upon what we had before . . . there are some serious shortcomings [in that disclosure] that prevent civil society organizations . . . from properly monitoring the flow of money in our oil sector.”); Publish What You Pay—Zimbabwe (Feb. 20, 2015) (“PWYP-ZIM”) (“Currently there is very little useful data published by government or industry in Zimbabwe's extractives sector.”); Global Witness (Dec. 18, 2013) (“Global Witness 2”) (referring to insufficient disclosure by governments and industry participants resulting in corruption among other things).

80
Escaping the Resource Curse, at 266.
See generally
Dilan Olcer, OECD Working Paper No. 276,
Extracting the Maximum from EITI
(Mar. 11, 2009) (describing the problem in terms of principal-agent theory where the country's citizens are the principal and the government officials are the agents: “The agent does not faithfully serve the interests of the principal because they have conflicting interests and
the actions of the agent are not observable by the principal
”) (emphasis added).

The public disclosure of resource extraction payments that are made to foreign governments can become an important step towards combatting the information asymmetries that can foster corruption and a lack of governmental accountability.
81

This is in part because

“[i]mproved transparency in the transactions between governments and extractive corporations means that there should be less room for hidden or opaque behavior[.]”
82

As one academic article describes it:

81

See, e.g.,
letter from State Department (explaining that a “sufficiently detailed level of information concerning payments from the extractive industry to foreign governments for the development of oil, natural gas, and minerals” that is made publicly available is necessary to achieve the anti-corruption and transparency objectives and further explaining that “[i]n the absence of this level of transparency, citizens have fewer means to hold their governments accountable, and accountability is a key component of reducing the

risk of corruption”); World Bank,
Striking a Better Balance—the World Bank Group and Extractive Industries: The Final Report of the Extractive Industries Review
(Sept. 17, 2004) (describing revenue transparency as “an important step”). We note that the potential for communities and civil society to reduce corruption and achieve greater governmental accountability exists even where the governments at issue have authoritarian tendencies.
See also
letter from ONE Campaign (Nov. 6, 2015) (“ONE Campaign”) (detailing various case studies involving successful citizen actions taken in countries such as Angola, Azerbaijan and Zimbabwe to “demonstrate[e] that even in countries with closed political systems and restricted civil liberties citizens are still able to use information to drive change”).

82
Dilan Olcer, OECD Working Paper No. 276,
Extracting the Maximum from EITI
(Mar. 11, 2009).
See also
156 CONG. REC. S5872 (July 15, 2010) (Statement of Senator Cardin) (“By giving the citizens the information about how payments are made to their country, they have a much better chance to hold their government officials accountable.”); Escaping the Resource Curse, at xiv (“The obvious remedy is greater transparency and accountability.”).
See generally
Global Witness,
Oil Revenue Transparency: A Strategic Component of U.S. Energy Security and Anti-Corruption Policy
(Mar. 2007) (“[E]nergy revenue transparency limits the scope of oil-related corruption through fiscal accountability.”); Caitlin C. Corrigan,
Breaking the Resource Curse: Transparency in the Natural Resources Sector and the Extractive Industries Transparency Initiative, Resources Policy
(2014) (“Transparency and accountability within government is expected to mitigate some of the negative economic and quality of governance effects seen in countries with poor institutions and abundant resources by making it harder for government to divert revenues to corruption and patronage.”).

Information asymmetries facilitate rent-seeking behavior and permit those in charge to utilize the country's resource wealth to advance their personal and political aims. In such a context, where informational asymmetries are key characteristics of power differentials, transparency is both difficult and a potential agent of change . . . Demystifying the extractive sector and financial flows dilutes some of the center's power by enabling other actors to participate more fully. It eliminates informational enclaves where incentives favor self-interested behavior.
83

83
Alexandra Gillies & Antoine Heuty,
Does Transparency Work? The Challenges of Measurement and Effectiveness in Resource-Rich Countries,
6 Yale J. Int'l Aff. 25 (2011).
See also id
. (“Transparency should alter incentives as perceived by the individual in charge by increasing the costs associated with `bad' policies or behavior, such as signing an unfavorable contract in exchange for a bribe or failing to property assess royalties. It should also alter incentives by increasing external pressure for decision makers to advance the broader national interest as information empowers broader constituencies.”); Ivar Kolstad & Arne Wiig,
Is Transparency the Key to Reducing Corruption in Resource Rich Countries?
World Development (Feb. 2009) (“Transparency, or access to information, can have an effect on corruption. Transparency can reduce bureaucratic corruption by making corrupt acts more risky . . . . Transparency can reduce political corruption by helping make politicians more accountable to the public.”); Liz David-Barrett & Ken Okamura,
The Transparency Paradox: Why Do Corrupt Countries Join EITI?,
Working Paper No. 38, European Research Centre for Anti-Corruption and State-Building (Nov. 2013) (“A lack of transparency makes corruption less risky and more attractive.”).
See generally
Escaping the Resource Curse, at 26 (“With the cost-benefit calculus for corruption changed, there might be less corruption.”).

While public disclosure of information about resource extraction payments to foreign governments should help reduce the information asymmetries that allow corruption to occur, the question remains of what form that disclosure should take to best reduce corruption consistent with the statutory objectives. Having considered the public comments received, information the staff learned from inter-agency consultations, relevant academic literature, and other expert analyses (as well as the mandatory disclosure regimes that have recently been adopted by the European Union and Canada), we are proposing to require company-specific, project-level, public disclosure of payment information as the means best designed to advance the U.S. Government's interests in reducing corruption and promoting accountability and good governance.

An important consideration in support of detailed project-level disclosure of the type proposed is that such disaggregated information may help local communities and subnational governments combat corruption by enabling them to verify that they are receiving the resource extraction revenue allocations from their national government that they may be entitled to under law.
84

Several commenters made this point. For example, a civil society group in Cameroon explained:

84

See, e.g.,
letter from National Advocacy Coalition on Extractives (Feb. 10, 2015) (“NACE”) (“In order to calculate the amount of money they are entitled to and hold [national] government agencies to account for allocating the correct amount, communities need access to project-level revenue data.”).

The Cameroonian Mining Code states that municipality and local communities are entitled to 25 percent of the Ad Valorem tax and Extraction tax paid by companies for the projects located in their jurisdiction . . . . [W]ithout project-level fiscal data, local populations will not be able to cross-check whether or not they are receiving the share of revenues they are legally entitled to.
85

85
Letter from Publish What You Pay Cameroon (June 8, 2015) (“PWYP-CAM”).
See also id
. (“Unfortunately, insufficient granularity is a serious flaw in Cameroon's EITI reports, as companies report the total amount of money they are pay[ing] for all projects in our country,
combined
.”) (emphasis in original).

A civil society group in Angola similarly represented that project-level data would help “ensur[e] [that] local communities receive their entitlements from revenue sharing agreements[.]”
86

Project-level disclosure could help reduce instances where government officials are corruptly depriving subnational governments and local communities of revenue allocations to which they are entitled.
87

86
Letter from Open Society Institute for Southern Africa-Angola (Jan. 29, 2015) (“OSISA-A”).
See also id
. (“[T]he Angolan government is required by law to transfer 10 per cent of the taxes generated by extraction projects in Cabinda directly to the provincial government. The revenue is earmarked for spending on local development initiatives in order to help offset some of the social and environmental costs of oil production for local communities. Similar oil revenue-sharing agreements exist in the Angolan provinces of Zaire and Bengo.”); letter from ONE Campaign (stating that in Burkina Faso mining companies are required to pay 1.0% of their revenues to local communities in which they operate in order to help communities finance improvements in healthcare, education, sanitation, and clean water and explaining that “[a]ccess to project-level payment information will be crucial for helping citizens to monitor that mining companies are paying 1% of revenues to local communities and to hold the government accountable for those funds”).

87
For example, a civil society group in Indonesia reports that it is already using Indonesia's EITI reports—which apparently now include project-level reporting—to “[e]nsur[e] that local governments and communities are properly compensated for the oil, gas, and mining activity in their” geographical areas.
See
Letter from Publish What You Pay—Indonesia (Mar. 11, 2015) (“PWYP-IND”) (“By law, local governments [in Indonesia] are to receive 15 percent of oil revenue generated by local projects, 30 percent of gas revenue, and 80 percent of mineral royalties . . . . [D]istrict governments and citizens inhabiting resource-rich areas can now calculate the share of extractives revenue they are owed, and confirm that it is delivered.”). We note that in an analogous area such public disclosure has reduced corruption.
See
R. Reinikka & J. Svensoon,
Fighting Corruption to Improve Schooling: Evidence from a Newspaper Campaign in Uganda,
Journal of European Economic Association (2005) (reporting that, following surveys in Uganda showing that only 13% of education grants actually reached schools in the 1990s (the rest being captured by local governments), the Ugandan government started to publish monthly grants to districts in newspapers; the study found that publication of the grants had a substantial effect on preventing the corrupt diversion of the funds such that, by 2001, more than 80% of grants on average reached schools).

Company-specific, project-level, public data also may permit citizens, civil society groups, and others to actively engage in the monitoring of revenue flows in various other ways that may reduce corruption and increase accountability.
88

For example, project-

level reporting would potentially allow for comparisons of revenue flows among different projects.
89

The potential to engage in cross-project revenue comparisons may allow citizens, civil society groups, and others to identify potential payment discrepancies that reflect corruption or other inappropriate financial discounts.
90

88

See generally
Liz David-Barrett & Ken Okamura,
The Transparency Paradox: Why Do Corrupt Countries Join EITI?,
Working Paper No. 38, European Research Centre for Anti-Corruption and State-Building (Nov. 2013) (“[P]roviding highly aggregated macroeconomic figures on oil revenues or expenditures is likely to result in collective action problems, where individual incentives to act on the information are weak.”); Bank Information Center & Global Witness,
Assessment of IMF and World Bank Group Extractive Industries Transparency Implementation
(Oct. 2008) (“Local

groups working on [extractive industry] transparency issues insist that project-level disclosure is necessary to carrying out meaningful tracking of revenue flows from extractive industries, especially important to local communities.”); letters from Iraqi Transparency Alliance (“[C]itizens most impacted by extraction—such as communities located near extraction sites—will require project-level data in order to determine whether they are receiving a fair share of services from their provincial governments. For example, a villager located near an extraction site might draw on project level data to discover that her provincial government is generating huge sums of money from a nearby project, yet providing relatively paltry services to the affected village. In such a case, project level payment information could be used to effectively lobby the provincial government for additional expenditures.”); and Transparency International-USA (Dec. 8, 2015) (stating that project-level disclosure “will allow anti-corruption groups to identify corruption and hold governments and companies to account”).

89

See, e.g.,
letters from PWYP-ZIM (“Project-level reporting would also allow for some comparison along projects at similar levels of maturation.”); CSCU (“[I]f revenue data is not disaggregated by company, it will not aid our understanding of the deals negotiated, and variations in payments made, by different companies.”).

90

See generally
letter from CSCU (“Only payment data that is company-specific would enable us to call on both companies and the Government to explain any substantial variations among different companies, and ensure that individual firms are not improperly obtaining fiscal benefits.”).

Furthermore, to the extent that a company's specific contractual or legal obligations to make resource extraction payments to a foreign government are known (or are discoverable), company-specific, project-level disclosure may help assist citizens, civil society groups, and others “to monitor individual company's contributions to the public finances and ensure firms are meeting their payment obligations.”
91

Such data may also help various actors ensure that the government “is properly collecting and accounting for payments.”
92

Relatedly, an important additional benefit of company-specific and project-level transparency “is that it would also act as a strong deterrent to companies underpaying royalties” or other monies owed.
93

91
Letter from CSCU.
See also
letter from ONE Campaign (describing how EITI disclosures in Liberia enabled civil society groups to discover that a mining company had fraudulently failed to pay over $100,000 to the government and to compel the company to make the required payment).

92

Id. See also

id.
(“[CSCU] is planning to use project- and company-level data . . . in conjunction with a new contract modeling tool developed by the U.K. NGO Global Witness, which allows citizens to use publicly available contracts to predict how much revenue a government will receive from that contract. We will check project-level payment data disclosed by companies against the model's predictions to analyze and raise questions about any discrepancies between reported payments from modeled predictions.”).
See generally
Dilan Olcer, OECD Working Paper No. 276,
Extracting the Maximum from EITI
(Mar. 11, 2009) (discussing the earlier version of the EITI which did not require project-level disclosure and explaining that “disaggregated data” is needed to “ensure the level of transparency that is necessary to enable scrutiny by outsiders”).

93
Letter from CSCU.

Additionally, we note that various commenters have asserted that “[p]roject-level reporting in particular will help communities and civil society [groups] to weigh the costs and benefits of an individual project.”
94

Where the net benefits of a project are small or non-existent, this may be an indication that the foreign government's decision to authorize the project is based on corruption or other inappropriate motivations.
95

94
Letter from PWYP-ZIM (“If, however, payments cannot be linked to a company or project, it will be impossible to carry out a full assessment of their impact.”).
See also
letters from Robert F. Conrad, Ph.D. (July 17, 2015) (“[P]roject level reporting is necessary for resource owners, whom I define as the citizens of most natural resource projecting countries, in order to evaluate the net benefits of resource development, both in total and at the margin.”); NACE (“Project level payment data is also necessary to enable communities to conduct an informed cost-benefit analysis of the projects in their backyard . . . . For local communities affected by extractive projects, knowledge of the total, combined amount a company has paid the government for all extractive projects is of little value; what matters most to a community is the revenue generated from the specific projects in its backyard.”).
See generally
letter from CSCU (explaining that the civil society group is planning to “translate the oil revenues into the potential tangible infrastructure and development projects that the revenues could fund to improve lives of citizens throughout the country and especially in areas where [the projects] are located . . . . By pairing the exact number of schools, health centers, roads, and power plants made possible by oil revenues from specific companies and projects with actual local need, [CSCU] aim[s] to educate citizens about the potential benefits of oil revenues, encourage them to become more engaged . . . and demand realization of these benefits on the ground.”).

95
Letter from PWYP-ZIM (explaining that without company-specific, project-level, public disclosure, “we would not know the monetary amounts received by the government when it sells individual licenses, which is fundamental to determining corruption and incentivizing public officials to secure a fair return on the sale of natural resources”).
Cf. generally
Escaping the Resource Curse, at 14 (“Corporations in the extractive industries also have an incentive to limit transparency, to make it more difficult for citizens to see how much their government is getting in exchange for sale of the country's resources.”).

Finally, in proposing company-specific, project-level, public disclosure of resource extraction payments to foreign governments, we are mindful that this new transparency alone would likely not eliminate corruption in connection with resource extraction payments to foreign governments.
96

The “ultimate impact [of the disclosures] will largely depend on the ability of all stakeholders—particularly civil society, media, parliamentarians, and governments—to use [the] available information to improve the management of their resource extractive sector.”
97

Nevertheless, the payment transparency that our proposed rules would promote could constitute an important and necessary step to help combat corruption in the resource extraction area.
98

96

See, e.g.,
Escaping the Resource Curse, at 333 (“[T]ransparency may well be a necessary condition for better management of oil and gas wealth, but it is unlikely to be a sufficient condition.”); Alexandra Gillies & Antoine Heuty,
Does Transparency Work? The Challenges of Measurement and Effectiveness in Resource-Rich Countries,
6 Yale J. Int'l Aff. 25 (2011) (“The availability and access to information can only address asymmetries if the stakeholders have the capacity and access needed to use the information and respond when decision makers fail to represent their interests.”).

97
Alexandra Gillies & Antoine Heuty,
Does Transparency Work? The Challenges of Measurement and Effectiveness in Resource-Rich Countries,
6 Yale J. Int'l Aff. 25 (2011).
See generally
Dilan Olcer, OECD Working Paper No. 276,
Extracting the Maximum from EITI
(Mar. 11, 2009) (stating that “transparency is only part of accountability, and may be of limited value if the other dimensions are neglected”).

98

See generally
Escaping the Resource Curse, at 278 (explaining that “[g]reater access to information sets the framework for producing better monitoring”).

Lastly, it appears to us that the U.S. Government may have few other means beyond the disclosure mechanism required by Section 13(q) to directly target governmental corruption associated with the extractive sector in foreign countries.
99

This reality informs our view that the public disclosure mechanism that we are proposing is a sensible, carefully tailored policy prescription.
100

99

See generally
Senate Report, 17-21 (discussing potential policy tools available to the U.S. Government).

100
We note that much of the commentary on improved transparency in connection with resource extraction payments to governments in resource-rich developing countries focuses on the potential to produce improved socio-economic conditions in those countries. In the context of the disclosures required by Section 13(q), however, we believe that the primary governmental interest is the more modest objective of reducing corruption and potentially enhancing governmental accountability; the potential to improve socio-economic conditions is, in our view, a secondary objective.
Compare generally
Alexandra Gillies & Antoine Heuty,
Does Transparency Work? The Challenges of Measurement and Effectiveness in Resource-Rich Countries,
6 Yale J. Int'l Aff. 25 (2011) (noting “[m]ethodological challenges” in demonstrating a “causal chain between the disclosure of information and improved development outcomes”);
with
Andres Mejia Acosta,
The Impact and Effectiveness of Accountability and Transparency Initiatives: The Governance of Natural Resources,
Development Policy Review (2013) (“Existing evidence of effective impact is also likely to increase as

countries are exposed for longer periods to [transparency and accountability initiatives].”).

II. Proposed Rules Under Section 13(q)

A. Definition of “Resource Extraction Issuer”

Section 13(q) defines a resource extraction issuer in part as an issuer that is “required to file an annual report with the Commission.” We believe this language could reasonably be read either to cover or to exclude issuers that file annual reports on forms other than Forms 10-K, 20-F, or 40-F. We are proposing, however, to cover only issuers filing annual reports on forms 10-K, 20-F, or 40-F. Specifically, the proposed rules would define the term “resource extraction issuer” to mean an issuer that is required to file an annual report with the Commission pursuant to Section 13 or 15(d) of the Exchange Act and that engages in the commercial development of oil, natural gas, or minerals.
101

The proposed definition would therefore exclude, for example, issuers subject to Tier 2 reporting obligations under Regulation A. In addition, consistent with the 2012 Rules, investment companies registered under the Investment Company Act of 1940 (“Investment Company Act”) would not be subject to the proposed rules.
102

101

See
proposed Rule 13q-1(c) and proposed Item 2.01(c)(11) of Form SD. We interpret “engages” as used in Section 13(q) and proposed Rule 13q-1 to include indirectly engaging in the specified commercial development activities through an entity under a company's control.
See
Section II.E below for our discussion of “control.”

102

See
2012 Adopting Release, n.390 (clarifying the Commission's intent to exclude companies required to file annual reports on forms other than Forms 10-K, 20-F or 40-F). The intended exclusion was not explicit in the definition of “resource extraction issuer” in the 2012 Rules.
See also
General Instruction C to Form SD (providing that the disclosures required in Form SD shall not apply to investment companies required to file reports pursuant to Investment Company Act Rule 30d-1).

We believe that covering other issuers would do little to further the transparency objectives of Section 13(q) but would add costs and burdens to the existing disclosure regimes governing those categories of issuers. In this regard, we note that none of the Regulation A issuers with qualified offering statements between 2009 and 2014 appear to have been resource extraction issuers at the time of those filings.
103

It also seems unlikely that an entity that fits within the definition of an “investment company”
104

would be one that is “engag[ing] in the commercial development of oil, natural gas, or minerals.”

103
Based on a review of their assigned Standard Industrial Classification (SIC) codes. Nevertheless, we recognize that Tier 2 of Regulation A, with a maximum offering amount of $50 million, is a new disclosure regime and that the types of companies previously or currently using Regulation A may not be representative of its future use. In addition, since Regulation A issuers were not required to file annual reports when Section 13(q) was enacted, it seems unlikely that Congress contemplated Regulation A issuers having to comply with Section 13(q). Given the added costs and burdens discussed above, we do believe it is prudent to extend the rule in this manner.

104

See
Section 3(a)(1) of the Investment Company Act (15 U.S.C. 80a-3(a)(1)).

As noted above, the proposed definition of the term “resource extraction issuer” would apply only to issuers that are required to file an annual report with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. As with the 2012 Rules, we are not proposing exemptions to the definition of resource extraction issuer based on size, ownership, foreign private issuer status,
105

or the extent of business operations constituting commercial development of oil, natural gas, or minerals. Some commenters on the 2012 Rules urged us to provide exemptions for certain categories of issuers that file annual reports pursuant to Section 13 or 15(d) of the Exchange.
106

Other commenters supported the approach we are proposing.
107

These commenters noted that the legislative intent underlying Section 1504 was to provide the broadest possible coverage of extractive companies so as to create a level playing field.
108

We agree that broader coverage would appear to serve better the transparency objectives of Section 13(q) by requiring disclosure from all the resource extraction issuers that are subject to our existing Exchange Act reporting framework. Moreover, as some commenters noted, additional categorical exemptions could contribute to an unlevel playing field and raise competitiveness concerns for companies that would be subject to the rules.
109

105
We believe that not including government-owned companies within the scope of the disclosure rules could raise competitiveness concerns.
See also
2012 Adopting Release at Section II.B.

106

See
2012 Adopting Release at Section II.B.2 for a discussion of these comment letters and related analysis.

107

See id.

108

See, e.g.,
letters from Calvert Investments (Mar. 1, 2011) (“Calvert 1”); Global Witness (Feb. 25, 2011) (“Global Witness 1”); Oxfam America (Feb. 21, 2011) (“Oxfam 1”); Publish What You Pay U.S. (Feb. 25, 2011) (“PWYP 1”); Senator Benjamin Cardin, Senator John Kerry, Senator Patrick Leahy, Senator Charles Schumer, and Representative Barney Frank (March 1, 2011) (“Sen. Cardin et al. 1”); Senator Carl Levin (Feb. 1, 2011) (“Sen. Levin 1”); and World Resources Institute (Mar. 1, 2011) (“WRI”).

109

See
2012 Adopting Release, nn. 33-34 and accompanying text.

In contrast to the call to provide exemptions, some commenters on the 2010 Proposing Release requested that the Commission extend the disclosure requirements to foreign private issuers that are exempt from Exchange Act registration and reporting obligations pursuant to Exchange Act Rule 12g3-2(b).
110

Those commenters asserted that requiring such issuers to comply with the disclosure requirements would help ameliorate anti-competitive concerns. As noted by commenters who opposed this suggestion, extending the disclosure required under Section 13(q) to companies that are exempt from Exchange Act registration and reporting would discourage reliance on Rule 12g3-2(b)
111

and would be inconsistent with the effect, and we believe the purpose, of that rule.
112

In this regard, we note that Rule 12g3-2(b) provides relief to foreign private issuers that are not currently Exchange Act reporting companies (
i.e.,
they are neither listed nor have made a registered offering in the United States) and whose primary trading market is located outside the United States. In these circumstances, we do not believe it would be appropriate to require foreign private issuers whose connections with the U.S. markets do not otherwise require them to make reports with the Commission to undertake such an obligation solely for the purpose of providing the required payment information. Moreover, imposing a reporting obligation on such issuers would seem to go beyond what is contemplated by Section 13(q), which defines a “resource extraction issuer” as an issuer that is “required to file an annual report with the Commission.”
113

While we acknowledge that not requiring these issuers to disclose the required payment information could potentially limit the transparency objectives of the statute, and potentially give rise to anti-competitive concerns as some commenters suggested, we believe these effects are mitigated by the fact that some foreign private issuers that are exempt from registration and reporting under Rule 12g3-2(b) may be listed in foreign jurisdictions, such as the European Union or Canada, that have recently implemented their own revenue transparency measures, in which case these issuers will be

required to disclose similar payment information in their home jurisdictions.

110

See
letters from American Petroleum Institute (Jan. 28, 2011) (“API 1”); Calvert 1; Exxon Mobil (Jan. 31, 2011) (“ExxonMobil 1”); Global Witness 1; Revenue Watch Institute (Feb. 17, 2011) (“RWI 1”); and Royal Dutch Shell plc (Jan. 28, 2011) (“RDS 2”).

111

See
letter from New York State Bar Association, Securities Regulation Committee (Mar. 1, 2011) (“NYSBA Committee”).

112

See
letter from National Mining Association (Mar. 2, 2011) (“NMA 2”) and NYSBA Committee.

113

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

Request for Comment

1. Should we exempt certain categories of issuers from the proposed rules, such as smaller reporting companies, emerging growth companies, or foreign private issuers?
114

If so, which ones and why? If not, why not? Should we exempt companies that are unlikely to make payments above the proposed de minimis threshold of $100,000?
115

For example, should we provide that a resource extraction issuer with annual revenues and net cash flows from investing activities below the de minimis threshold in a fiscal year would not be subject to the proposed disclosure rules for the subsequent fiscal year? Should we use a threshold that is different from the de minimis threshold or some other measure of an issuer's ability to make such payments to make this determination? Alternatively, should our rules provide for different disclosure and reporting obligations for these or other types of issuers? If so, what should the requirements be?

114

See
the definition of “smaller reporting company” in Exchange Act Rule 12b-2 [17 CFR 240.12b-2], the definition of “emerging growth company” in Exchange Act Section 3(a)(80) [15 U.S.C. 78c(a)(80)], and the definition of “foreign private issuer” in Exchange Act Rule 3b-4 [17 CFR 240.3b-4].

115

See
Sections II.C.2 and III.B.2.b below.

2. Should we provide for a delayed implementation date for certain categories or types of issuers in order to provide them additional time to prepare for the disclosure requirements and the benefit of observing how other companies comply?

3. Should we, as proposed, limit the definition of “resource extraction issuer” to those issuers that are required to file an annual report with us under Exchange Act Section 13 or 15(d), thus excluding issuers who file annual reports pursuant to other provisions? Why or why not? For example, should we, as proposed, exclude issuers subject to Tier 2 reporting obligations under Regulation A?

4. Would our proposed rules present unique challenges for particular categories of issuers? If so, what is the nature of these challenges and could they be mitigated?

5. Should we define “resource extraction issuer” to include investment companies registered under the Investment Company Act? Why or why not?

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

As noted above, Section 13(q) defines “commercial development of oil, natural gas, or minerals.”
116

Consistent with the statute and the 2012 Rules we propose to define “commercial development of oil, natural gas, or minerals” to include exploration, extraction, processing, export and the acquisition of a license for any such activity. This approach should enhance international transparency by covering activities similar to those covered by the EU Directives and Canada's ESTMA.
117

Prior to the 2012 Rules, we received significant comment on this aspect of the proposal. Some commenters sought a more narrow definition than proposed, while other commenters sought a broader definition.
118

Although we have discretionary authority under Section 13(q) to include other significant activities relating to oil, natural gas, or minerals, we are not proposing to do so. As a general matter, in light of the potentially significant costs associated with the proposed rules, we have not sought to impose disclosure obligations that extend beyond Congress' required disclosures and the disclosure standards developed in connection with international transparency efforts. In this regard, we note that the definition of “commercial development” in Section 13(q) is broader than the activities typically covered by the EITI
119

and in some respects, other comparable disclosure regimes.
120

116

See
Section I above.

117
The EU Directives cover “exploration, prospection, discovery, development, and extraction of minerals, oil, natural gas deposits or other materials.”
See, e.g.,
Article 41(1) of the EU Accounting Directive. ESTMA defines “commercial development of oil, gas or minerals” as “(a) the exploration or extraction of oil, gas or minerals; (b) the acquisition or holding of a permit, licence, lease or any other authorization to carry out any of the activities referred to in paragraph (a); or (c) any other prescribed activities in relation to oil, gas or minerals.”

118

See
2012 Adopting Release at Section II.C.2. Although we have received several comments since the U.S. District Court for the District of Columbia vacated the rules adopted in 2012, none has addressed the scope of “commercial development.”

119
An EITI plan typically covers the “upstream activities” of exploration and production but not “downstream activities,” such as processing or export. The relevant multi-stakeholder group does, however, have the option of expanding the scope of its EITI program by including some downstream activities.
See
the EITI Handbook, at 35.

120
For example, processing, export, and the acquisition of licenses are not specifically mentioned by the EU Directives.

As noted in the 2010 Proposing Release, the proposed definition of “commercial development” is intended to capture only activities that are directly related to the commercial development of oil, natural gas, or minerals.
121

It is not intended to capture activities that are ancillary or preparatory to such commercial development. Accordingly, we would not consider an issuer providing only services that support the exploration, extraction, processing, or export of such resources to be a “resource extraction issuer,” such as an issuer that manufactures drill bits or provides hardware to help companies explore and extract.
122

Similarly, an issuer engaged by an operator to provide hydraulic fracturing or drilling services, thus enabling the operator to extract resources, would not be considered a resource extraction issuer. We note, however, that where a service provider makes a payment to a government on behalf of a resource extraction issuer that meets the definition of “payment,” under the proposed rules, the resource extraction issuer would be required to disclose such payments. We believe this approach is consistent with Section 13(q) and the approach of the EU Directives and the EITI that only companies directly engaged in the extraction or production of oil, natural gas, or minerals must disclose payments made to governments.
123

121

See
2010 Proposing Release at Section II.C.

122
Marketing activities would also not be included. Section 13(q) does not include marketing in the list of activities covered by the definition of “commercial development.” In addition, including marketing activities within the final rules under Section 13(q) would go beyond what is covered by the EITI and other international regimes.
See, e.g.,
the EITI Handbook, at 35. For similar reasons, the definition of “commercial development” does not include activities relating to security support.
See
2012 Adopting Release at Section II.D for a related discussion of payments for security support.

123
It does not appear that such activities are covered by the EU Directives' provisions on resource extraction payment disclosure. For example, Article 41 of the EU Accounting Directive only refers to the economic activities listed in “Section B, Divisions 05 to 08 of Annex I to Regulation (EC) No 1893/2006” when defining the types of companies subject to the disclosure rules. Activities such as “mining support service activities” and “support activities for petroleum and natural gas extraction,” however, are not included in those Divisions but are explicitly included in Division 09.

In response to commenters' prior requests for clarification of the activities covered by the proposed definition of “commercial development,” we are identifying the activities that would be covered by the terms “extraction” and “export” and providing examples of the activities that would be covered by the term “processing.” We note, however, that whether an issuer is a resource extraction issuer would depend on the specific facts and circumstances. “Extraction” would mean the production of oil and natural gas as well as the extraction of minerals.
124

“Processing” would include, but is not limited to, midstream activities such as the processing of gas to remove liquid hydrocarbons, the removal of impurities from natural gas prior to its transport through a pipeline, and the upgrading of bitumen and heavy oil, through the earlier of the point at which oil, gas, or gas liquids (natural or synthetic) are

either sold to an unrelated third party or delivered to a main pipeline, a common carrier, or a marine terminal. It would also include the crushing and processing of raw ore prior to the smelting phase.
125

124
Proposed Item 2.01(c)(5) of Form SD.

125

See
proposed Instruction 7 to Item 2.01 of Form SD.

We do not believe that “processing” should include the downstream activities of refining or smelting. The objective of the disclosure required by Section 13(q) is to make more transparent the payments that resource extraction issuers make to governments, which are primarily generated by “upstream” activities like exploration and extraction. Issuers do not typically make payments to the host government in connection with refining or smelting. We also note that in other contexts Congress has treated midstream activities like “processing” and downstream activities like “refining” as separate activities, which further supports our view that Congress did not intend to include “refining” and “smelting” as “processing” activities.
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Finally, we note that including refining or smelting within the rules under Section 13(q) would go beyond what is currently contemplated by the EITI, which does not typically include the downstream activities of refining and smelting.
127

The EU Directives also do not cover refining or smelting in its list of covered activities.
128

126
The Sudan Accountability and Divestment Act of 2007 (“SADA”), which also relates to resource extraction activities, specifically includes “processing” and “refining” as two distinct activities in its list of “mineral extraction activities” and “oil-related activities . . .”
See
110 P.L. No. 174 (2007). Similarly, the Commission's oil and gas disclosure rules exclude refining and processing from the definition of “oil and gas producing activities” (other than field processing of gas to extract liquid hydrocarbons by the company and the upgrading of natural resources extracted by the company other than oil or gas into synthetic oil or gas).
See
Rule 4-10(a)(16)(ii) of Regulation S-X [17 CFR 210.4-10(a)(16)(ii)] and 2012 Adopting Release, n.108.

127

See, e.g.
,
the EITI Handbook, at 35.

128

See, e.g.,
Article 41(1) of the EU Accounting Directive (including “exploration, prospection, discovery, development, and extraction” in the definition of an “undertaking active in the extractive industry,” but not including refining or smelting).

“Export” would mean the transportation of a resource from its country of origin to another country by an issuer with an ownership interest in the resource.
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This definition of the term “export” reflects the significance of the relationship between upstream activities such as exploration and extraction and the categories of payments to governments identified in the statute. In contrast, we do not believe that Section 13(q) was intended to capture payments related to transportation on a fee-for-service basis across an international border by a service provider with no ownership interest in the resource.
130

129

See
proposed Item 2.01(c)(4) of Form SD. Several commenters have argued that “export” means the removal of the resource from the place of extraction to the refinery, smelter, or first marketable location.
See
2012 Adopting Release, nn.111, 112, 134 and accompanying text. We believe that our interpretation of “export” better captures the intended meaning of that term. In this regard, we are not aware of anything in Section 13(q) or the legislative history that suggests Congress meant “export” to have a meaning that does not require the resource to be transported across an international boundary.

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It is noteworthy that Section 13(q) includes export, but not transportation, in the list of covered activities. In contrast, SADA specifically includes “transporting” in the definition of “oil and gas activities” and “mineral extraction activities.” The inclusion of “transporting” in SADA, in contrast to the language of Section 13(q), suggests that the term export means something different than transportation.

In an effort to emphasize substance over form or characterization and to reduce the risk of evasion, we are also proposing an anti-evasion provision.
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The proposed rules would require disclosure with respect to an activity (or payment) that, although not within the categories included in the proposed rules, is part of a plan or scheme to evade the disclosure required under Section 13(q).
132

For example, under this provision a resource extraction issuer could not avoid disclosure by re-characterizing an activity as transportation that would otherwise be covered under the rules.
133

131

See
Section II.C.1 below for more detail on the anti-evasion provision.

132

See
proposed Rule 13q-1(b).

133
Similarly, if a resource extraction issuer were to make a payment to a third party in order to avoid disclosure under the proposed rules, whether at the direction of a foreign government or otherwise, the proposed rules would require the disclosure of such payment.

Request for Comment

6. Should we, as proposed, define “commercial development of oil, natural gas, or minerals” as the term is described in the statute? Should it be defined more broadly or more narrowly? If more broadly, should the definition of “commercial development of oil, natural gas, or minerals” include any additional activities not expressly identified in the statute? If so, what activities should be covered? Would including additional activities impose any significant additional costs on issuers? Does our proposed definition further the U.S. Government's foreign policy objective of battling corruption and, in so doing, potentially improve governance and accountability in resource-rich countries? If not, what would?

7. Should any of the activities listed in the statute be excluded from the definition of “commercial development of oil, natural gas, or minerals?” If any activities should be excluded, which activities and why?

8. Should activities that are ancillary or preparatory, such as services associated with or in support of activities included in Section 13(q), be expressly included in activities covered by the rules, resulting in the companies performing such services being considered “resource extraction issuers?” Why or why not? Should we provide any additional guidance regarding the types of activities that may be “directly related” to the “commercial development of oil, natural gas, or minerals,” as opposed to activities that are ancillary or preparatory? For example, are other types of services so critical to the commercial development of oil, natural gas, or minerals that they should be covered expressly by the rules? Why or why not?

9. Should we provide additional guidance on which activities would be covered by the terms “extraction,” “processing,” and “export?” If so, what guidance would be helpful?

10. As noted above, “extraction” would mean the production of oil and natural gas as well as the extraction of minerals. Are the activities covered too narrow or too broad?

11. As noted above, “processing” would include midstream activities such as (a) the processing of gas to remove liquid hydrocarbons, (b) the removal of impurities from natural gas prior to its transport through a pipeline, (c) the upgrading of bitumen and heavy oil, through the earlier of the point at which oil, gas, or gas liquids (natural or synthetic) are either sold to an unrelated third party or delivered to a main pipeline, a common carrier, or a marine terminal, and (d) the crushing and processing of raw ore prior to the smelting phase. Are these examples of “processing” too narrow or too broad? Why or why not?

12. As discussed above, the definition of “commercial development of oil, natural gas, or minerals” would not cover transportation made for a purpose other than export and “export” would mean transportation from the resource's country of origin to another by a person with an ownership interest in the resource. Are the activities covered too narrow or too broad? Why or why not? For example, should the definition be broadened to include “transportation” more generally? Should “export” include all transportation from one country to another, regardless of ownership interest or whether the resource originated in the country from which it is being transported?

C. Definition of “Payment”

Section 13(q) defines “payment” to mean a payment that:

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

• is not de minimis; and

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

1. Types of Payments

Consistent with the 2012 Rules, the proposed rules define payments to include the specific types of payments identified in the statute. In addition to the statutory mandate to include these types of payments, we note that these payments are identified in the EITI's guidelines,
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as well as the EU Directives and other regulations. Thus, including them is also consistent with the Congressional mandate for our rules to support international transparency promotion efforts. In addition to the types of payments expressly included in the definition of payment in the statute, Section 13(q) provides that the Commission include within the definition “other material benefits,” subject to the requirement that it determines they are “part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals.” According to Section 13(q), these “other material benefits” must be consistent with the EITI's guidelines “to the extent practicable.”
135

134

See
EITI Standard, at 26.

135
15 U.S.C. 78m(q)(1)(C)(ii).

Some commenters suggested that we include a broad, non-exhaustive list of payment types or category of “other material benefits.”
136

That approach, however, would be inconsistent with our view that Section 13(q) directs us to make an affirmative determination that the other “material benefits” are part of the commonly recognized revenue stream. Thus, under the proposed rules, resource extraction issuers would be required to disclose only those payments that fall within the specified list of payment types in the statute, as well as payments of certain dividends and for infrastructure payments (discussed below). We have determined that these payment types represent material benefits that are part of the commonly recognized revenue stream and that otherwise meet the definition of “payment.” In support of this determination, we note that the EU Directives and other recent international transparency promotion efforts also require only these payment types to be disclosed.
137

136

See
2012 Adopting Release, n.175 and accompanying text.

137

See, e.g.,
Article 41(5) of the EU Accounting Directive and Section 2 of ESTMA.

We agree with certain commenters who stated that it would be appropriate to add some of the types of payments included under the EITI that are not explicitly mentioned under Section 13(q).
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Accordingly, we propose adding dividends to the list of payment types required to be disclosed. The proposed rules clarify in an instruction that a resource extraction issuer generally would not need to disclose divi

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2015-31702. Public record. Not legal advice.