Disclosure of Payments by Resource Extraction Issuers

Federal RegisterJul 27, 2016

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249b

[Release No. 34-78167; File No. S7-25-15]

RIN 3235-AL53

Disclosure of Payments by Resource Extraction Issuers

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

We are adopting 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 the 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:

Effective date:

The final rule and form amendment are effective September 26, 2016.

Compliance date:

A resource extraction issuer must comply with the final rule and form for fiscal years ending on or after September 30, 2018.

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 adopting Rule 13q-1

and an amendment to Form SD

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

17 CFR 240.13q-1.

17 CFR 249.448.

15 U.S.C. 78a

et seq.

Table of Contents

I. Introduction and Background

A. Section 13(q) of the Exchange Act

B. The 2012 Rules and Litigation

C. International Transparency Efforts

1. European Economic Area

2. Canada

3. EITI

D. Summary of the Final Rules

II. Final Rules Under Section 13(q)

A. Definition of “Resource Extraction Issuer”

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

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

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

C. Definition of “Payment”

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

D. Definition of “Subsidiary” and “Control”

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

E. Definition of “Project”

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

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

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

G. Annual Report Requirement

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

H. Public Filing

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

I. Exemption From Compliance

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

J. Alternative Reporting

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

K. Exhibits and Interactive Data Format Requirements

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

L. Treatment for Purposes of Securities Act and Exchange Act

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

M. Compliance Date

1. Proposed Rules

2. Comments on the Proposed Rules

3. Final Rules

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

IV. Paperwork Reduction Act

A. Background

B. Estimate of Issuers

C. Estimate of Issuer Burdens

V. Final Regulatory Flexibility Act Analysis

A. Need for the Rules

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Rules

D. Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

VI. Statutory Authority

I. Introduction and Background

On December 11, 2015, we re-proposed a rule and form amendments-

to implement Section 13(q) of the Exchange Act (the “Proposing Release”). Rules implementing Section 13(q) were previously adopted by the Commission on August 22, 2012 (the “2012 Rules”),

but were vacated by the U.S. District Court for the District of Columbia by order dated July 2, 2013.

Exchange Act Release No. 34-76620 (Dec. 11, 2015), 80 FR 80057 (Dec. 23, 2015)

available at

http://www.sec.gov/rules/proposed/2015/34-76620.pdf

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”).

API

SEC,

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

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”).

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.”

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

15 U.S.C. 78m(q)(2)(A). As discussed 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.

Section 13(q) also defines several key terms, such as “resource extraction issuer,”

“commercial development of oil, natural gas, or minerals,”

“foreign government,”

and “payment,”

each of which is addressed in detail below.

See

Section I.C below.

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.”).

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

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

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

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

Section 13(q) provides 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.”

In light of this directive, we have considered significant international initiatives in connection with the final rules, such as the Extractive Industries Transparency Initiative (“EITI”) and the regulations enacted by the European Union and Canada.

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

See

Section I.C below for a discussion of these disclosure regimes, including why they are significant.

See also

Proposing Release, nn.13-18 and accompanying text.

Pursuant to Section 13(q), the rules we adopt must require a resource extraction issuer to submit the payment information included in an annual report in an electronic data format in which the information is identified using a standardized list of electronic tags.

Section 13(q) lists certain electronic tags that must be included in the rules to identify specified information

while also authorizing the Commission to require additional electronic tags for other information that it determines is necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. 78m(q)(1)(E), (1)(F), (2)(C), (2)(D).

These tags include: (I) the total amounts of the payments, by category; (II) the currency used to make the payments; (III) the financial period in which the payments were made; (IV) the business segment of the resource extraction issuer that made the payments; (V) the government that received the payments and the country in which the government is located; (VI) and the project of the resource extraction issuer to which the payments relate. 15 U.S.C. 78m(q)(2)(D)(ii).

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

Section 13(q) further 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.

The statute does not define the term compilation or describe how it should be generated.

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 . . . .”

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.

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

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

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

The Commission filed an expedited schedule for promulgating the final rule with the court on October 2, 2015. Consistent with that schedule, the Commission re-proposed rules and form amendments on December 11, 2015. The comment period for the re-proposal was divided into an initial comment period and a reply comment period. These comment periods were subsequently extended in response to a request by the API.

The Commission received 369

letters (including one form letter submitted 308 times and a petition with 116,923 signatures) responding to the requests for comment in the Proposing Release.

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 comment periods for specific rulemakings 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 comments were also received between the issuance of the 2012 Adopting Release and the recent Proposing Release and are available at

https://www.sec.gov/comments/df-title-xv/resource-extraction-issuers/resource-extraction-issuers.shtml

See

API et al.

SEC, No. 12-1668 (D.D.C. Oct. 10, 2012). Petitioners also filed suit in the U.S. Court of Appeals for the DC Circuit, which subsequently dismissed the suit for lack of jurisdiction. See

API v.

SEC

, 714 F. 3d 1329 (D.C. Cir. 2013).

API

SEC

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

Oxfam America, Inc.

United States Securities and Exchange Commission,

126 F. Supp. 3d 168 (D. Mass. 2015).

In response to API's request, the Commission extended the initial comment period from January 25, 2016 to February 16, 2016 and the reply comment period from February 16, 2016 to March 8, 2016.

See

letter from API (Jan. 7, 2016) and Exchange Act Release No. 34-76958 (Jan. 21, 2016),

81 FR 4598 (Jan. 27, 2016),

available at

http://www.sec.gov/rules/proposed/2016/34-76958.pdf

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

http://www.sec.gov/comments/s7-25-15/s72515.shtml

C. International Transparency Efforts

As discussed at length in the Proposing Release, Section 13(q) reflects the U.S. foreign policy interest in supporting global efforts to improve the transparency of payments made in the extractive industries in order to help combat global corruption and promote accountability.

We formulated the proposed rules with the purpose of furthering these interests, and federal agencies with specific expertise in this area submitted comments affirming that the proposed rules would accomplish that purpose.

Notably, the U.S. Department of State expressed the view that, if adopted, the proposed rule would be a “strong tool to increase transparency and combat corruption” and stated that it would advance “the United States' strong foreign policy interests in promoting transparency and combatting corruption globally.”

In addition, the U.S. Agency for International Development (“USAID”) stated that the proposed rule, if adopted, would be “a significant step toward greater energy and mineral industry transparency and, correspondingly, strengthened governance and civil society anti-corruption efforts.”

According to USAID, “enforcement of the proposed rule would contribute towards U.S. Government foreign policy goals of supporting stable and democratic governments, and in particular towards USAID's goal of providing assistance to resource-rich countries in support of economic growth, good governance, transparency, and building civil society.”

See

Section I.E of the Proposing Release, which we hereby expressly incorporate by reference.

See also

156 Cong. Rec. S3976 (May 19, 2010) (Sen. Feingold) (explaining that Section 13(q) is intended to “empower[] citizens in resource-rich countries in their efforts to combat corruption and hold their governments accountable”). The importance placed by the United States and other members of the international community on reducing global corruption was recently illustrated through the international anti-corruption summit that British Prime Minister David Cameron hosted in London on May 12, 2016. The summit brought together world leaders, business, and civil society to agree to a package of steps to, among other things, promote transparency measures that expose corruption. The summit adopted a Global Declaration Against Corruption that specifically endorsed the promotion of transparency and governance in the resource extraction sector.

See Global Declaration Against Corruption

(May 12, 2016),

available at

https://www.gov.uk/government/publications/global-declaration-against-corruption/global-declaration-against-corruption

(last visited June 16, 2016). President Obama and the other leaders of the G7 nations in Japan during their annual conference similarly emphasized the importance of combatting global corruption. See G7 Ise-Shima Leaders' Declaration (May 26, 2016),

available at

http://www.mofa.go.jp/files/000160266.pdf

(last visited June 16, 2016) (“[r]ecognizing the magnitude of the global problem of corruption” and “reiterat[ing] that our collective and individual action to fight corruption is critical for economic growth, sustainable development and maintaining peace and security”).

We note that the legislative history also indicates that Congress intended for the Section 13(q) disclosures to serve as an informational tool for investors.

See, e.g.,

156 Cong. Rec. S3815 (May 17, 2010) (Sen. Cardin) (“Investors need to know the full extent of a company's exposure”);

id.

at S3816 (May 17, 2010) (Sen. Lugar) (“[the disclosures] would empower investors to have a more complete view of the value of their holdings”).

Letter from the United States Department of State (Jan. 21, 2016) (“State Department”).

Letter from U.S. Agency for International Development (Feb. 16, 2016) (“USAID”). According to its Web site, USAID “carries out U.S. foreign policy by promoting broad-scale human progress at the same time it expands stable, free societies, creates markets and trade partners for the United States, and fosters good will abroad.” USAID,

Who We Are, available at

https://www.usaid.gov/who-we-are

(last visited June 16, 2016). USAID is particularly committed to transparency, such as the President's Open Government Initiative.

See

USAID,

Our Commitment to Transparency, available at

https://www.usaid.gov/results-and-data/progress-data/transparency

(last visited June 16, 2016).

Id.

Other commenters, including individuals and non-governmental organizations, supported the view that Section 13(q) was enacted to further the U.S. Government's interest in improving transparency in an effort to help combat global corruption and promote accountability.

For example, one commenter stated that “the governmental interest of reducing corruption and potentially enhancing governmental accountability . . . underpins [Section 13(q)].”

Another commenter stated that “[p]romoting revenue transparency in the extractives sector with a robust implementation of Section 1504 would provide civil society the necessary tools to prevent and combat corruption worldwide” and that since “natural resource extraction accounts for at least 10% of GDP in 61 countries, the potential benefits of strong rules under Section 1504 are significant in terms of healthier and better educated populations, creating more productive societies and higher economic growth rates.”

Comments we received on the Proposing Release from former and current members of the U.S. Congress supported our interpretation of the transparency and anti-corruption goals of Section 13(q).

These current and former U.S. senators stated that “transparency is a critical tool to ensure that citizens in resource rich countries can monitor the economic performance of oil, gas and mining projects and ensure that revenues, especially if more meager than hoped, are used responsibly.”

Significantly, this view was not limited to government, civil society, and individual commenters. Industry commenters also attested to a link between Section 13(q)'s promotion of increased transparency and reducing corruption.

See, e.g.,

letters from American Security Project (Jan. 21, 2016) (“ASP”); Elise J. Bean (Feb. 16, 2016) (“Bean”); BHP Billiton (Jan. 25, 2016) (“BHP”); Pietro Poretti (Feb. 15, 2016) (“Poretti”); Publish What You Pay—US (Feb. 16, 2016) (“PWYP-US 1”); and Transparency International—USA (Feb. 16, 2016) (“TI-USA”).

See

letter from Poretti.

See

letter from TI-USA.

See

letter from Senators Cardin, Baldwin, Brown, Coons, Durbin, Leahy, Markey, Menendez, Markley, Shaheen, Warren, and Whitehouse (Feb. 5, 2016) (“Sen. Cardin et al.”) and letter from retired Senators Lugar, Dodd, and Levin (Feb. 4, 2016) (“Sen. Lugar et al.”).

Id.

See

letters from BHP (“Transparency by governments and companies alike regarding revenue flows from the extraction of natural resources in a manner which is meaningful, practical and easily understood by stakeholders reduces the opportunity for corruption”) and Total S.A. (Jan. 13, 2016) (“Total”) (“Total considers that the re-introduction of Rule 13q-1 under the Dodd Frank Act should both restore a level playing field among major publicly-listed oil and gas companies and improve transparency to help combat global corruption and increase accountability.”).

To determine how best to achieve the policy objectives of Section 13(q) and to meet the statutory directive to “support the commitment of the Federal Government to international transparency promotion efforts” to the extent practicable, we also have considered the current state of international transparency efforts. The following discussion addresses the global transparency initiatives that have developed since the 2012 Adopting Release was issued, including in the European Union, Canada, and through the EITI.

As discussed below, these initiatives govern a significant percentage of the companies that will be impacted by the final rules.

We look to the EITI because it is a significant international transparency framework, it was mentioned in the legislative history of Section 13(q), and the definition of “payment” in Section 13(q)(1)(C)(ii) [15 U.S.C. 78m(q)(1)(C)(ii)] specifically refers to the EITI.

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.”).

See

Section III.B.2.b below for our estimates regarding the number of resource extraction issuers

that are already subject to other disclosure regimes. We estimate that approximately 25% of resource extraction issuers are already subject to the EU Directives or ESTMA, but this percentage does not include resource extraction issuers subject to the EITI.

1. European Economic Area

The European Parliament and Council of the European Union adopted two directives that include payment disclosure rules.

The EU Accounting Directive and the EU Transparency Directive (the “EU Directives”) are very similar to each other in content. They determine the applicability and scope of the disclosure requirements and set the baseline in each EU member state and European Economic Area (“EEA”)

country for annual disclosure requirements for oil, gas, mining, and logging companies concerning the payments they make to governments on a per country and per project basis.

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

incorporated under the laws of an EU member state or those of an EEA country, even if the company is privately held. 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

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

The EU Directives also apply to payments made by entities that are part of a company's consolidated report.

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 (“EU Transparency Directive”).

See

European Commission Memo (June 12, 2013) (“Commissioner Barnier welcomes European Parliament vote on the Accounting and Transparency Directives (including country by country reporting)”). The EEA is composed of the EU member states plus Iceland, Liechtenstein, and Norway.

Unlike the proposed rules and the rules we are adopting today, the EU Directives also apply to companies active in the logging of primary forests.

See

Article 3(4) of the EU Accounting Directive, which defines large companies (

i.e.,

“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 $22.5 million (USD) as of June 16, 2016); (b) net turnover of €40 million (approximately $44.9 million (USD) as of June 16, 2016); and (c) average number of employees of 250.

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://registers.esma.europa.eu/publication/searchRegister?core=esma_registers_mifid_rma

(last visited June 16, 2016).

See

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

See, e.g.,

EU Accounting Directive, Art. 44.

The EU Directives generally cover the following activities: “exploration, prospection, discovery, development, and extraction of minerals, oil, natural gas deposits or other materials.”

The types of payments that must be disclosed when made in connection with those activities include: (a) Production entitlements; (b) taxes levied on the income, production, or profits of companies, excluding taxes levied on consumption such as value added taxes, personal income taxes, or sales taxes; (c) royalties; (d) dividends; (e) signature, discovery, and production bonuses; (f) license fees, rental fees, entry fees, and other considerations for licenses and/or concessions; and (g) payments for infrastructure improvements.

These payments are covered whether made “in money or in kind.”

EU Accounting Directive, Art. 41(1).

See, e.g.,

EU Accounting Directive, Art. 41(5).

Id.

Disclosure of payments is made on a per project and per government basis. “Project” is defined as “the operational activities that are governed by a single contract, license, lease, concession or similar legal agreements and form the basis for payment liabilities with a government.”

The definition goes on to state that “if multiple such agreements are substantially interconnected, this shall be considered a project.”

“Substantially interconnected” under the EU Directives means “a set of operationally and geographically integrated contracts, licenses, leases or concessions or related agreements with substantially similar terms that are signed with a government, giving rise to payment liabilities.”

See, e.g.,

EU Accounting Directive, Art. 41(4).

Id.

Contrary to the proposed rules and those we are adopting today, the EU Directives appear to require aggregation of “substantially interconnected” agreements rather than providing such aggregation as an option.

See, e.g.,

EU Accounting Directive, Recital 45.

The EU Directives require public disclosure of the payment information, including the issuer's identity.

Further, the EU Directives do not provide any exemptions unique to the resource extraction payment disclosure requirements. They do, however, 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.

These criteria include: (i) Target undertakings; (ii) target recipients of payments; (iii) payments captured; (iv) attribution of payments captured; (v) breakdown of payments captured; (vi) triggers for reporting on a consolidated basis; (vii) reporting medium; (viii) frequency of reporting; and (ix) anti-evasion measures. No equivalency determinations have been made to-date in the EEA.

See, e.g.,

EU Accounting Directive, Arts. 43, 45.

See, e.g.,

EU Accounting Directive, Arts. 46, 47.

Member states are granted some leeway for when the report is due and what penalties will result from violations of the regulations.

Required public disclosure of payments in an annual report by companies has begun in the European Union

and will occur in all European Union and EEA member countries once the essential provisions have been transposed into domestic law in each country.

See, e.g.,

EU Accounting Directive, Art. 45 (“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 . . . .”).

See, e.g.,

RDS Report discussed in note 302 below.

The requirements of the EU Directives are implemented through the enacting legislation of each EEA member country. The deadlines for implementing the EU Accounting Directive and the EU Transparency Directive were July 20, 2015 and November 26, 2015 respectively. It is our understanding that as of the date of this release, 24 countries have implemented the EU Accounting Directive and 15 countries have implemented the EU Transparency Directive. 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. As of the date of this release, it is our understanding that the EEA Joint Committee has not yet adopted a decision on the Transparency Directive. As of June 16, 2016, Austria, Belgium, Croatia, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Spain, Slovenia, Spain, Sweden, and the United Kingdom have filed notifications of full transposition (

i.e.,

implementation) of the Accounting Directive with the European Commission. As of June 16, 2016, Austria, Croatia, Cyprus, Estonia, Finland, France, Germany, Greece, Hungary, Italy, Lithuania, The Netherlands, Slovakia, Sweden, and the United Kingdom have filed notifications of full transposition of the Transparency Directive with the European Commission. Norway, a non-EU member of the EEA, 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.

Updates about member country progress towards full transposition can be found at:

http://ec.europa.eu/finance/enforcement/directives/index_en.htm#accounting

See also

letter from Arlene McCarthy OBE (Mar. 8, 2016) (“McCarthy”) (stating that “most Member States have transposed the EU Directives”).

2. Canada

Canada also adopted a federal resource extraction disclosure law, the Extractive Sector Transparency Measures Act (“ESTMA”) after the 2012 Adopting Release was issued.

Since the Proposing Release, Canada finalized, substantially as proposed, its previously issued ESTMA Guidance

and the ESTMA Technical Reporting Specifications (“ESTMA Specifications”).

ESTMA covers entities that are engaged in the commercial development of oil, gas, or minerals or that control another entity that is engaged in those activities, subject to certain limitations.

ESTMA defines “control” as being controlled by another entity “directly or indirectly, in any manner,” including those entities in a chain of control.

The ESTMA Guidance also addresses issues related to how payments are reported in situations of joint control.

See

ESTMA, 2014 S.C., ch. 39, s. 376 (Can.), which came into force on June 1, 2015.

ESTMA Guidance,

available at

http://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/mining-materials//ESTMA-Guidance_e.pdf

ESTMA Specifications,

available at

http://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/mining-materials//ESTMA-Technical_e.pdf

ESTMA, Section 2. The reporting obligation applies to (a) an entity that is listed on a stock exchange in Canada; (b) an entity that has a place of business in Canada, does business in Canada or has assets in Canada and that, based on its consolidated financial statements, meets at least two of the following conditions for at least one of its two most recent financial years: (i) It has at least $20 million (CAD) in assets (approximately $15.4 million (USD) as of June 16, 2016), (ii) it has generated at least $40 million (CAD) in revenue (approximately $30.8 million (USD) as of June 16, 2016), (iii) it employs an average of at least 250 employees; and (c) any other prescribed entity. ESTMA, Section 8.

ESTMA, Section 4(1)-(2). For example, in the statute's words an “entity that controls another entity is deemed to control any entity that is controlled, or deemed to be controlled, by the other entity.” ESTMA, Section 4(2).

ESTMA Guidance, Section 3.6 clarifies that if a Reporting Entity makes a payment, it must report it, whether made as an operator of a joint arrangement or as a member of a joint arrangement. Also, if a payment is made by an entity that is not subject to ESTMA but is controlled by a Reporting Entity, the Reporting Entity must report it. Payment attribution rules set out in ESTMA may apply in situations of joint control. The ESTMA Guidance goes on to say that Reporting Entities should consider the facts and circumstances of payments when determining whether to report and which payments to report in situations of joint control.

ESTMA defines “commercial development of oil, gas or minerals” as the exploration or extraction of oil, gas, or minerals; the acquisition of a permit, license, lease, or any other authorization to carry out the exploration or extraction of oil, gas, or minerals; or any other prescribed activities in relation to oil, gas, or minerals.

The ESTMA Guidance clarifies that exploration or extraction refers to “the key phases of commercial activity which occur during the life cycle of an oil, gas or mineral project” and extend to prospecting, remediation, and reclamation.

The ESTMA Guidance also states that these terms are not limited to “active phases of operations on the ground, but also captures temporary periods of inactivity.”

The definition is not meant to cover ancillary or preparatory activities such as manufacturing equipment or the construction of extraction sites.

The definition also generally does not cover post-extraction activities, such as refining, smelting, processing, marketing, distribution, transportation, or export.

Nevertheless, certain initial processing activities that are integrated with extraction operations may be considered commercial development of oil, gas, or minerals.

ESTMA, Section 2. Canada does not appear to have prescribed any additional activities at this time.

See

ESTMA Guidance, Section 1, which only refers to the first two prongs of ESTMA's definition of “commercial development of oil, gas and minerals.”

ESTMA Guidance, Section 1.

Id.

Canada's regulations capture the following payment types: Taxes (other than consumption taxes and personal income taxes); royalties; fees (including rental fees, entry fees and regulatory charges, as well as fees or other consideration for licenses, permits or concessions); production entitlements; bonuses (including signature, discovery and production bonuses); dividends (other than dividends paid to payees as ordinary shareholders); and infrastructure improvement payments.

The ESTMA Guidance also includes a provision similar to the anti-evasion provision included in the Proposing Release. It states that entities should look to the substance, rather than the form, of payments in determining which category is applicable, and that in certain circumstances a philanthropic or voluntary contribution made in lieu of one of the payment categories would need to be reported.

ESTMA Guidance, Section 3.1.

ESTMA Guidance, Section 3.5.

Unlike the EU Directives, which do 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.”

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. ESTMA did, however, defer the requirement for issuers to report payments made to Aboriginal governments in Canada until June 1, 2017.

See

ESTMA, Section 23(1).

ESTMA Guidelines, Section 3.3.

Canada has adopted project-level reporting, and the definition of “project” used in the ESTMA Specifications is identical to the definition of that term in the EU Directives.

Reports prepared under ESTMA must be published on the internet “so they are available to the public” and a link to the report must be provided to the Canadian government.

See

ESTMA Specifications, Section 2.3.2.

ESTMA Specifications, Section 2.4.

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

As noted in the Proposing Release, on July 31, 2015 the Minister determined that the reporting requirements set forth in the EU Directives were an acceptable substitute for Canada's requirements under ESTMA.

Canada's current substitution policy makes an assessment based on whether a jurisdiction's reporting requirements (1) achieve the purposes of the reporting requirements under ESTMA (as stated, to “deter corruption through public transparency”) and (2) address a similar scope of the reporting requirements under ESTMA.

Canada requires that an issuer must be subject to the reporting requirements of the other jurisdiction and must have provided the report to the other jurisdiction's competent authority. Although it has adopted a reporting deadline of 150 days after the end of an issuer's financial (

i.e.,

fiscal) year, Canada

allows for substituted reports to be filed according to the other jurisdiction's deadline if the Department of Natural Resources Canada is notified by email within the 150 day period.

If the other jurisdiction's deadline is shorter than 150 days, the issuer may still follow the 150 day deadline when submitting the report in Canada.

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 . . . .”).

Substitution Process and Determination,

available at

http://www.nrcan.gc.ca/mining-materials/estma/18196

(last visited June 16, 2016).

See id.

Id.

3. EITI

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 to foster and improve transparency and accountability in resource-rich countries through the publication and verification of company payments and government revenues from oil, natural gas, and mining.

A country volunteers to become an EITI candidate and must complete an EITI validation process to become a compliant member.

Currently 51 countries are EITI implementing countries.

Furthermore, several countries not currently a part of the EITI have indicated their intention to implement the EITI.

We analyze the EITI using the guidance in the EITI Standard and the EITI Handbook on what should be included in a country's EITI plan, as well as reports made by EITI member countries.

The U.S. Extractive Industries Transparency Initiative (“USEITI”) issued its first report in December 2015.

The report covered payments made to the U.S. Federal Government in 2013, including $12.6 billion for extraction on federal lands and $11.8 billion in corporate income tax receipts from mining and petroleum and coal products manufacturing industries.

See

Implementing EITI for Impact-A Handbook for Policymakers and Stakeholders (2011) (“EITI Handbook”), at xii.

Notably, in enacting Section 13(q)'s mandatory disclosure requirement, Congress sought to complement the EITI's existing voluntary transparency efforts that too many countries and too many companies either had not joined or would not. 156 Cong. Rec. S3815 (May 17, 2010) (Sen. Lugar).

See also

letters from ACEP; Global Witness 1; and Oxfam 1.

111

See

letter from USSIF.

112

Letter from Department of Interior.

3. Final Rules

We are adopting the proposed definition of “resource extraction issuer.” Under the final rules, resource extraction issuers are issuers that are required to file an annual report with the Commission pursuant to Section 13 or 15(d) of the Exchange Act and engage in the commercial development of oil, natural gas, or minerals.

113

We continue to interpret “engages” as used in Section 13(q) and Rule 13q-1 to include indirectly engaging in the specified commercial development activities through an entity under a company's control.

See

Section II.D below for a discussion of “control” as used in the final rules.

See also

Proposing Release, n. 101.

As discussed above, almost all of the commenters on the Proposing Release supported the proposed definition or called for the rules to cover all companies without exemptions. We disagree with the commenter that suggested foreign private issuers should be excluded from the definition of “resource extraction issuer.”

114

This commenter stated that an exemption for all foreign private issuers was justifiable so that issuers only bear the compliance burden associated with one set of transparency rules. We note, however, that not all foreign private issuers will be required to report in other jurisdictions. Further, even if the issuer is required to file reports in another jurisdiction, an exemption for all foreign private issuers leaves open the possibility that the foreign private issuer's reporting could be pursuant to a jurisdiction's requirements that are significantly different than the Commission's rules. Instead, we believe that it is more appropriate to address concerns over duplicative reporting through the alternative reporting provisions we are adopting today.

115

114

See

letter from BP.

115

See

Section II.J below. We note that the commenter that raised these concerns indicated that if the Commission did not adopt an exemption for foreign private issuers, it would support an alternative reporting provision.

See

letter from BP.

No commenters on the Proposing Release specifically 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). As we discussed in the Proposing Release,

116

we continue to believe that expanding the statutory definition to include such issuers is not appropriate because it would discourage reliance on Rule 12g3-2(b) and would be inconsistent with the effect, and we believe the purpose, of that rule.

117

116

See

Section II.A. of Proposing Release.

117

As we discussed in the Proposing Release, 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.”

Although, as we stated in the Proposing Release, we believe that the statutory 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, and 40-F, we also continue to believe that covering other issuers would do little to further the transparency objectives of Section 13(q). It would, however, add costs and burdens to the existing disclosure regimes governing those categories of issuers. For example, and as noted in the Proposing Release, 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.

118

That remains the case for Regulation A issuers that qualified offering statements in 2015. We also continue to believe that it is unlikely that an entity that fits within the definition of an “investment company”

119

would be one that is “engag[ing] in the commercial development of oil, natural gas, or minerals.” Accordingly, the final rules we are adopting will not apply to such issuers.

120

118

Based on a review of their assigned Standard Industrial Classification (SIC) codes. We recognize that Tier 2 of Regulation A, with a maximum offering amount of $50 million, is still relatively new 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 in the Proposing Release, we continue to believe that it is not prudent to extend the rule to Regulation A issuers at this time.

See

Proposing Release, Section II.A.

119

See

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

120

See

Proposing Release, Section II.A for a discussion of the factors we considered.

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

1. Proposed Rules

Section 13(q) defines “commercial development of oil, natural gas, or minerals.” Consistent with the statute, we proposed defining “commercial development of oil, natural gas, or minerals” as exploration, extraction, processing, and export of oil, natural gas, or minerals, or the acquisition of a license for any such activity. Although we have discretionary authority to include other significant activities relating to oil, natural gas, or minerals,

121

we did not propose expanding the definition beyond the explicit terms of Section 13(q).

121

See

Section 13(q)(1)(A).

As discussed in the Proposing Release, the proposed definition of “commercial development” was intended to capture only activities that are directly related to the commercial development of oil, natural gas, or minerals, and not activities ancillary or preparatory to such commercial development.

122

We also proposed additional guidance on several terms contained within the definition of “commercial development of oil, natural gas, or minerals.”

123

For example, we identified activities that would be covered by the terms “extraction” and “export,” and we provided examples of the activities that would be covered by the term “processing.”

124

122

See

Proposing Release, at Section II.B.

123

Id.

124

Id. See also

Section II.B.1.3 below for a discussion of this guidance.

2. Comments on the Proposed Rules

a. Scope of the Definition

In the Proposing Release we solicited comment on how we should define “commercial development of oil, natural gas, or minerals.” For example, we asked whether the definition should include any activities that were not expressly identified in the statute and what definition would further the U.S. Government's foreign policy objective of battling corruption through improved transparency. In light of the Commission's general exemptive authority, we solicited comment on whether certain activities listed in the statute should be excluded from the definition. We also sought input on whether activities that are ancillary or preparatory to resource extraction should be included in the activities covered by the rules and whether the Commission should provide additional guidance on the types of activities that would be considered “directly related” to the “commercial development of oil, natural gas, or minerals.”

All but one of the commenters that addressed this aspect of the Proposing Release supported the proposed definition,

125

stating that it was consistent with established international transparency standards.

126

An industry commenter disputed that view, but otherwise generally supported the proposed definition.

127

The Department of Interior also supported the definition despite noting that the USEITI does not cover revenues from processing, exporting, or the acquisition of licenses to engage in those activities.

128

125

See

letters from ACEP; Department of Interior; Exxon Mobil Corp. (Mar. 8, 2016) (“ExxonMobil 2”); Global Witness 1; Oxfam 1; and PWYP-US 1. One commenter, Encana Corporation, did not expressly support or object to our definition of commercial development of oil, natural gas, or minerals, but rather requested that the Commission provide additional guidance “to clarify the activities covered by the proposed terms used to define `commercial development of oil, natural gas, or minerals.' ”

See

letter from Encana Corporation (Jan. 25, 2016) (“Encana”). Specifically, Encana requested guidance that would “reflect consistency with the definition of “Oil and Gas Producing Activities” in Rule 4-10 of Regulation S-X and “exclude post-extraction activities such as refining, smelting, processing, marketing, distribution, transportation, or export.”

126

See, e.g.,

letter from PWYP-US 1.

127

See

letter from ExxonMobil 2.

128

See

letter from Department of Interior.

b. Guidance on “Extraction,” “Processing,” and “Export”

In the Proposing Release we solicited comment on whether additional guidance should be provided on the activities covered by the terms “extraction,” “processing,” or “export” and whether the proposed definitions and guidance were too narrow or too broad. For the term “export,” we specifically asked whether the definition should be broadened to 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.

Several commenters supported the proposed definition of “extraction” and the proposed guidance on “processing.”

129

Certain commenters, however, recommended providing additional guidance on “processing.”

130

For example, one commenter requested clarification that “processing” only includes “initial processing activities that are integrated with extraction operations” and “does not extend to ancillary or preparatory activities such as manufacturing equipment or construction of extraction sites.”

131

Another commenter requested additional guidance on the scope of “midstream” activities that would be covered by “processing.”

132

129

See

letter from PWYP-US 1.

See also

letters from ACEP; Global Witness 1; and Oxfam 1.

130

See

letters from Encana and Petróleo Brasileiro S.A. (Feb. 16, 2016) (“Petrobras”).

131

See

letter from Encana.

132

See

letter from Petrobras.

As for the definition of “export,” one commenter requested clarification on whether that term covers commodity trading-related activities and situations such as when an issuer exports oil, natural gas, or minerals purchased from a government or from a state-owned company.

133

Another commenter requested clarification of the term “mineral,” stating that it could have a variety of meanings, such as homogeneous crystalline substances (which would exclude gravel or non-crystalline rocks) or naturally occurring inorganic solids (which would exclude coa1).

134

133

See

letter from Poretti.

134

See

letter from Keith Bishop (Jan. 5, 2016) (“Bishop”).

3. Final Rules

We are adopting the proposed definition of “commercial development of oil, natural gas, or minerals” but with additional guidance on its application. Although commenters pointed out that both the statutory definition and the proposed definition are broader than the activities typically covered by the EITI

135

and, in some respects, other comparable disclosure regimes,

136

most commenters supported the proposal.

135

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.

136

For example, as discussed in Section I.C.1-2 above, processing, export, and the acquisition of licenses are not specifically mentioned by the EU Directives, and ESTMA generally does not include processing or export.

Despite one commenter's recommendation that the final rules exclude “processing” and “export,” both terms are expressly included in the statutory definition, and we believe that these are important aspects of the commercial development of oil, natural gas, or minerals.

137

Although there are differences between the definition we are adopting today and that used in other transparency regimes, we believe our approach enhances international transparency by covering activities similar to those covered by the EU Directives, Canada's ESTMA, and the EITI, while remaining consistent with Section 13(q).

138

In this regard, the final rules focus only on issuers engaged in the extraction or production of oil, natural gas, or minerals. Where a service provider makes a payment to a government on behalf of a resource extraction issuer that meets the definition of “payment,” the resource extraction issuer will be required to disclose such payment.

137

See

letter from Encana. In light of the statutory definition and the purpose of Section 13(q), we are not narrowing the definition of “commercial development” to make it consistent with the definition of “Oil and Gas Producing Activities” in Rule 4-10 of Regulation S-X. The definition of “Oil and Gas Producing Activities” in Rule 4-10 of Regulation S-X excludes all natural resources other than oil and gas. Using that definition would exclude minerals and be contrary to the plain language of Section 13(q). Moreover, narrowing the definition in that manner would limit the level of transparency provided by the final rules and would be significantly different from the approach taken in the EU Directives, ESTMA, and the EITI. In the 2012 Adopting Release we took the same approach in response to similar suggestions from commenters.

See

2012 Adopting Release, Section II.C.3

138

The EU Directives cover “exploration, prospection, discovery, development, and extraction of minerals, oil, natural gas deposits or other materials.”

See, e.g.,

EU Accounting Directive, Art. 41(1). 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.”

Although we are adopting the general definition of “commercial development of oil, natural gas, or minerals” as proposed, as well as reiterating much of the related guidance, we are revising certain key terms found in that definition in response to commenters' concerns. We note, however, that whether an issuer is a resource extraction issuer ultimately depends on the specific facts and circumstances. We are adopting the definition of “extraction” as proposed. Thus, “extraction” means the production of oil and natural gas as well as the extraction of minerals.

139

Also as proposed, “processing” includes, 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 also includes the crushing and processing of raw ore prior to the smelting phase.

140

“Processing” does not include downstream activities, such as refining or smelting. As we noted in the Proposing Release, the focus of the disclosures required by Section 13(q) is on transparency in connection with the payments that resource extraction issuers make to governments. Those payments are primarily generated by “upstream” activities like exploration and extraction and not in connection with refining or smelting.

141

Finally, we note that including refining or smelting within the rules under Section 13(q) would go beyond what is contemplated by the statute, EITI, EU Directives, and ESTMA.

142

139

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

140

See

proposed Instruction 7 to Item 2.01 of Form SD.

141

We also noted in the Proposing Release that in other contexts Congress has treated midstream activities like “processing” and downstream activities like “refining” as separate activities, which further supports our view that Congress did not intend to include “refining” and “smelting” as “processing” activities. For example, the Sudan Accountability and Divestment Act of 2007 (“SADA”), which also relates to resource extraction activities, specifically includes “processing” and “refining” as two distinct activities in its list of “mineral extraction activities” and “oil-related activities . . .”

See

110 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.

142

See, e.g.

the EITI Handbook, at 35; EU Accounting Directive, Art. 41(1) (including “exploration, prospection, discovery, development, and extraction” in the definition of an “undertaking active in the extractive industry,” but not including refining or smelting).

See also

ESTMA Guidance at Section 1 (“Commercial development generally does not include post-extraction activities. Refining, smelting or processing of oil, gas or minerals, as well as the marketing, distribution, transportation or export, is generally not captured as commercial development for the purposes of the Act. However, certain initial processing activities are often integrated with extraction operations and may comprise commercial development of oil, gas or minerals.”)

The final rules define “export” as the transportation of a resource from its country of origin to another country by an issuer with an ownership interest in the resource, with certain exceptions described below.

143

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.

144

Nor do we believe that “export” was intended to capture activities with little relationship to upstream or midstream activities, such as commodity trading-related activities. Accordingly, the definition of “export” we are adopting does not cover the movement of a resource across an international border by a company that (a) is not engaged in the exploration, extraction, or processing of oil, natural gas, or minerals and (b) acquired its ownership interest in the resource directly or indirectly from a foreign government or the Federal Government.

145

The definition does cover, however, the purchase of such government-owned resources by a company otherwise engaged in resource extraction due to the stronger link between the movement of the resource across an international border and the upstream development activities. This link would be particularly strong in instances where the company is repurchasing government production entitlements that were originally extracted by that issuer.

146

143

See

Item 2.01(d)(4) of Form SD.

144

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.

145

See

Item 2.01(d)(4) of Form SD.

See also

letter from Poretti (seeking clarification of the scope of “export” under the rules).

146

See

Section C below for a more detailed discussion of when and how such payments must be reported.

Contrary to the recommendation of one commenter, we have not defined “minerals” in the final rules.

147

Although ESTMA defines minerals as “all naturally occurring metallic and non-metallic minerals, including coal, salt, quarry and pit material, and all rare and precious minerals and metals,” the EU Directives do not provide a definition.

148

We believe that this term is commonly understood in the industry,

149

as are the terms “oil” and “natural gas,” and is not “indefinite” as claimed by this commenter.

150

We also believe that the commonly understood meaning of “mineral” is consistent with the definition of that term in ESTMA described above.

147

See

letter from Bishop.

148

ESTMA, Section 2.

149

In this regard, we note that none of the industry commenters, or for that matter any commenters other than Bishop, indicated a need to define this term. We believe that this also supports our view that, as commonly used when referring to mineral resources, “mineral” refers to the broader, non-technical meaning, which is any organic or inorganic natural resource extracted from the earth for human use.

150

We do note, however, that we consider the commonly understood meaning of “mineral” to include, at a minimum, any solid material for which an issuer with mining operations would provide disclosure under the Commission's existing disclosure requirements and policies, including Industry Guide 7, or any successor requirements or policies. The Commission's staff has previously provided similar guidance.

See

Disclosure of Payments by Resource Extraction Issuers FAQ 3 (May 30, 2013),

available at

https://www.sec.gov/divisions/corpfin/guidance/resourceextraction-faq.htm

The definition of “commercial development of oil, natural gas, or minerals” in the final rules does not capture activities that are ancillary or preparatory to such commercial development.

151

We do not consider an issuer that is only providing products or 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.

152

Similarly, an issuer engaged by an operator to provide hydraulic fracturing or drilling services, thus enabling the operator to extract resources, is not a resource extraction issuer. Nevertheless, a resource extraction issuer must disclose payments when a service provider makes a payment to a government on its behalf that meets the definition of “payment” in the final rules.

153

151

This is consistent with Canada's ESTMA.

See

ESTMA Guidance at Section 1 (“Commercial development is not intended to extend to ancillary or preparatory activities for the exploration or extraction of oil, gas or minerals. For example, activities such as manufacturing equipment or construction of extraction sites would not be included.”)

152

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.

153

As we discuss in Section II.I.3 below, we are providing for delayed reporting for payments related to exploratory activities.

See

Item 2.01(b) of Form SD.

C. Definition of “Payment”

1. Proposed Rules

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.

The proposed definition of “payment” included the specific types of payments identified in the statute, as well as payments of certain dividends and infrastructure payments.

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

154

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

155

the proposed rules provided that issuers could disclose those payments at the entity level.

156

154

See

proposed Instruction 8 to Item 2.01 of Form SD.

155

See

2012 Adopting Release, n.155 and accompanying text.

156

See

proposed Instruction 4 to Item 2.01 of Form SD.

Also consistent with Section 13(q), the proposed rules required a resource extraction issuer to disclose fees, including license fees, and bonuses paid to further the commercial development of oil, natural gas, or minerals. The proposed rules included an instruction stating that fees include rental fees, entry fees, and concession fees, and that bonuses include signature, discovery, and production bonuses.

157

The fees and bonuses identified, however, were not an exclusive list, and under the proposed rules, the issuer could have been required to disclose other fees and bonuses as well.

157

See

proposed Instruction 9 to Item 2.01 of Form SD.

For payments of dividends, which, along with infrastructure payments, is not specified in the statute, an instruction in the proposed rules stated that an issuer generally would not need to disclose dividends paid to a government as a common or ordinary shareholder of the issuer as long as the dividend is paid to the government under the same terms as other shareholders.

158

Under the proposed

rules, the issuer would, however, have been required to disclose any dividends paid to a government in lieu of production entitlements or royalties. Under the proposed approach, ordinary dividend payments were not considered part of the commonly recognized revenue stream, because they are not made to further the commercial development of oil, natural gas, or minerals.

159

We also proposed requiring a resource extraction issuer to disclose in-kind payments.

160

The proposed rules specified that an issuer must report in-kind payments at cost, or if cost was not determinable, fair market value, and required the issuer to provide a brief description of how the monetary value was calculated.

161

158

See

proposed Instruction 10 to Item 2.01 of Form SD.

159

See

Proposing Release, at Section II.C.1.

160

See

proposed Instruction 11 to Item 2.01 of Form SD.

161

See

proposed Instruction 11 to Item 2.01 of Form SD.

See also

Section 3(e) of ESTMA (“[T]he value of a payment in kind is the cost to the entity—or, if the cost cannot be determined, the fair market value—of the goods and services that it provided.”). The EU Directives do not specify how in-kind payments should be calculated, but require “supporting notes . . . to explain how their value has been determined.”

See, e.g.,

Section 43(3) of the EU Accounting Directive.

The proposed rules defined a “not de minimis” payment as one that equals or exceeds $100,000, or its equivalent in the issuer's reporting currency, whether made as a single payment or series of related payments.

162

Finally, the proposed rules required disclosure of activities or payments that, although not within the categories included in the proposed rules, are part of a plan or scheme to evade the disclosure requirements under Section 13(q).

163

162

See

proposed Item 2.01(c)(8)(ii) of Form SD. For example, a resource extraction issuer that paid a $150,000 signature bonus would be required to disclose that payment. The proposed definition also clarified that disclosure would be required for related periodic payments (

e.g.,

rental fees) when the aggregate amount of such payments exceeds the payment threshold. This is similar to other instructions in our rules requiring disclosure of a series of payments.

See, e.g.,

Instructions 2 and 3 to Item 404(a) of Regulation S-K (17 CFR 229.404(a)). Therefore, under the proposed rules, a resource extraction issuer obligated to pay royalties to a government annually and that paid $10,000 in royalties on a monthly basis to satisfy its obligation would be required to disclose $120,000 in royalties.

163

See

proposed Rule 13q-1(b).

2. Comments on the Proposed Rules

a. Types of Payments

In the Proposing Release we solicited comment on whether we should add other payment types, such as CSR payments, or remove certain payment types from the proposed list. In particular, we asked whether other types of payments should be considered part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals. We also asked whether the Commission should provide additional guidance on how to interpret the proposed list of covered payment types, particularly whether additional guidance should be provided on the types of fees or bonuses that would be covered by the rules and how to distinguish CSR payments from infrastructure payments. Finally, we also included a request for comment on whether the rules should prescribe a specific method for determining the fair market value of in-kind payments.

Several commenters supported the proposed definition of “payment,”

164

while others recommended adding additional payment types or changing our approach to particular payment types. A number of commenters, including one industry commenter, recommended adding CSR payments to the definition.

165

These commenters stated that CSR payments are common in the industry and should be considered part of the commonly recognized revenue stream for resource extraction.

166

One of these commenters also questioned the characterization in the Proposing Release that the European Union and Canada are consistent in not requiring CSR payments.

167

An industry commenter was particularly concerned with distinguishing between CSR payments and infrastructure payments and recommended requiring both types of payments when required by contract with the host government.

168

Another industry commenter, however, opposed including CSR payments, stating that those payments were not part of the commonly recognized revenue stream due to their “philanthropic or voluntary . . . nature.”

169

164

See

letters from ACEP; Encana; Department of Interior; Global Witness 1; Oxfam 1; PWYP-US 1; and USAID.

165

See

letters from ACEP; Prof. Harry G. Broadman and Bruce H. Searby (Jan. 25, 2016) (“Broadman & Searby”); Exxon Mobil Corp. (Feb. 16, 2016) (“ExxonMobil 1”); Eugen Falik (Mar. 7, 2016) (“Falik”); Global Witness 1; Oxfam 1; PWYP-US 1; and USAID.

166

See, e.g.,

Broadman & Searby and ExxonMobil 1.

167

See

Broadman & Searby (stating that “there is no consistency after all between Europe's and Canada's regimes to which the Commission should adhere for the sake of equalizing standards and reporting burdens.”).

See

note 212 below and accompanying text.

168

See

letter from ExxonMobil 1.

169

See

letter from Encana.

Several commenters recommended adding commodity trading-related payments to the definition of “payment.”

170

These commenters stated that purchases of resources sold by a government or a state-owned company are prone to corruption and are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals. They also stated that in many countries commodity trading-related payments constitute the largest revenue stream to the government. Another commenter expressed uncertainty as to whether such payments were covered by the proposed rules and noted that confusion may arise for others as well since the current EITI Standard leaves it to the discretion of a country's multi-stakeholder group whether to require the reporting of payments to governments for the purchase of natural resources by buying companies.

171

Other commenters stated that covering commodity trading-related payments would inappropriately expand the reach of the rules beyond payments associated with in-country extractive development and would substantially increase the cost of reporting without apparent benefit.

172

These commenters stated that such an approach would double-count government revenues given that the government's share of production is already required to be disclosed under the rules.

170

See

letters from PWYP-US 1; NRGI 1.

See also

letters from ACEP; Global Witness 1; and Oxfam 1.

171

See

letter from Poretti (noting that some EITI reports (

e.g.,

Iraq's EITI Reports for the years 2011, 2012, and 2013) contain information about payments reported by buyers of exported crude oil).

172

See

letters from API (Mar. 8, 2016) (“API 2”) and ExxonMobil 2.

Beyond CSR payments and commodity trading-related payments, commenters recommended that the rules cover other types of payments, such as when an issuer covers government expenses, provides jobs to persons related to government officials, or invests in companies created by officials or related persons.

173

For example, one commenter recommended that guidance be added to either the discussion of reportable payments or the proposed anti-evasion provision indicating that payments in excess of the de minimis threshold should be disclosed if: (1) The payments were subtracted from or substituted for otherwise reportable payments; (2) the payments were requested by or associated with a government official suspected of corruption; or (3) the payments raise corruption concerns, including by creating an appearance of possible corruption, and those payments would otherwise be undisclosed to the public.

174

Another commenter recommended including fines and

penalties in the definition.

175

This commenter also stated that the EITI standard requires “any other significant payments and material benefit to government” to be reported and that the USEITI's multi-stakeholder group has interpreted that to include penalties.

176

This commenter noted that fines and penalties represent significant payments to governments and that Section 13(q) instructs the Commission to define payment consistently with the EITI standard.

173

See

letters from Bean and USAID.

174

See

letter from Bean.

175

See

letter from TI-USA.

176

Section 4.1(b) of EITI Standard.

Commenters supported the proposed requirement for issuers to disclose the method they used to calculate the value of in-kind payments.

177

One commenter recommend that in-kind payments be reported at cost or fair market value, as determined by the issuer, rather than allowing only the use of fair market value if cost is not determinable.

178

This commenter also noted that, under ESTMA, in-kind payments are reported at the cash value of the production entitlements that the payee takes possession of during the relevant financial period. Several other commenters supported requiring issuers to disclose the volume of resources associated with the in-kind payments.

179

These commenters noted that the EU Directives require disclosure of volume and that such a requirement would enhance government accountability and understanding of an issuer's methodology.

180

Another commenter, however, stated that adding a requirement for issuers to report the volume of in-kind payments is unnecessary and could cause competitive harm by effectively disclosing contractual selling prices.

181

This commenter stated that reporting fair market value of in-kind payment types was sufficient.

182

Another commenter requested that the Commission provide examples for determining fair market value for in-kind payments.

183

177

See

letters from Encana and PWYP-US 1.

See also

letters from ACEP; Global Witness 1; and Oxfam 1.

178

See

letter from Encana.

179

See

letter from PWYP-US 1.

See also

letters from ACEP; Global Witness 1; and Oxfam 1.

180

See

EU Accounting Directive, Art. 43(3) (“Where payments in kind are made to a government, they shall be reported in value and, where applicable, in volume.”)

181

See

letter from ExxonMobil 2.

182

Although ExxonMobil only mentions using fair market value and not cost, from the context it does not appear to be recommending a change to our proposed approach that calls for cost reporting, or if cost is not determinable, fair market value.

183

See

letter from Petrobras.

A number of commenters also requested additional guidance on the types of payments covered by the rules.

184

Several commenters supported including a non-exclusive list of the types of royalties in a manner similar to what was proposed for fees and bonuses.

185

The recommended instruction would further clarify that the examples of fees, bonuses, and royalties are non-exclusive and the list of royalties would include unit based, value-based, and profit-based royalties. One commenter requested additional guidance on how to isolate the corporate income tax payments made on income generated from the commercial development of oil, natural gas, or minerals given that income earned from business activities beyond resource extraction would be taxed as well.

186

Another commenter recommended clarifying in Form SD that payments may be reported either on a cash basis or on an accrual basis.

187

This commenter noted the contrast between the Proposing Release, which seems to leave open the question as to whether an issuer may elect to present payments on either basis, and prior staff guidance, which indicates that payment information is required to be presented on an unaudited, cash basis for the year in which the payments are made.

188

184

See

letters from Encana; ExxonMobil 1; Petrobras; and PWYP-US 1.

See also

letters from ACEP; Global Witness 1; and Oxfam 1.

185

See

letter from PWYP-US 1.

See also

letters from ACEP; Global Witness 1; and Oxfam 1.

186

See

letter from Petrobras.

187

See

letter from Cleary.

188

See

Dodd-Frank Wall Street Reform and Consumer Protect Act FAQs: Disclosure of Payments by Resource Extraction Issuers (May 30, 2013) (“Resource Extraction FAQs”), FAQ 7,

available at

https://www.sec.gov/divisions/corpfin/guidance/faq.htm

b. The “Not De Minimis” Requirement

A key component of the definition of “payment” is how “not de minimis” should be defined. In the Proposing Release, we solicited comment on various aspects of this definition. For example, we requested comment on whether a $100,000 threshold is too low or too high, whether a different threshold should apply to smaller reporting companies or other categories of issuers, and whether we should provide additional guidance on how and when an issuer would have to aggregate a series of related payments. If commenters thought a different threshold should apply, we asked for their input on how that threshold would interact with the thresholds established by other countries. We also asked whether the final rules should include a mechanism to adjust periodically the de minimis threshold to reflect the effects of inflation.

Most commenters supported the proposed definition of “not de minimis.”

189

For example, the Department of Interior noted that it was the same standard that is used in its disclosure of revenue data.

190

It also recommended not including an automatic adjustment mechanism because a stable threshold would allow the USEITI and industry to plan better for making ongoing disclosures. Several commenters also noted the similarity of the proposed threshold to those used in the European Union and Canada.

191

Another commenter stated that the threshold was “unreasonably low for companies working on massive scale projects” and would thus be too costly.

192

Finally, one commenter requested clarification on whether the de minimis threshold is meant to be calculated based on the currency conversion in effect at the time of payment, or at the end of the period covered by the report.

193

189

See

letters from Department of Interior; Form Letter A; PWYP-US 1; and Quinones.

See also

letters from ACEP; Global Witness 1; and Oxfam 1.

190

See

letter from Department of Interior.

191

See

letter from PWYP-US 1.

See also

letters from ACEP; Global Witness 1; and Oxfam 1.

192

See

letter from Nouveau (Feb. 16, 2016) (“Nouveau”).

193

See

letter from Bishop.

c. Anti-Evasion Provision

In the Proposing Release we also solicited comment on whether the proposed anti-evasion provision would promote compliance with the disclosure requirements and whether we should provide additional guidance on when the anti-evasion provision would apply. Several commenters supported this provision.

194

As described above, one commenter recommended that guidance be added to either the discussion of reportable payments or the proposed anti-evasion provision indicating that payments in excess of the de minimis threshold should be disclosed if: (1) The payments were subtracted from or substituted for otherwise reportable payments; (2) the payments were requested by or associated with a government official suspected of corruption; or (3) the payments raise corruption concerns, including by creating an appearance of possible corruption, and those payments would otherwise be undisclosed to the public.

195

Several other commenters endorsed the proposed anti-evasion provision, but recommended adding language stating that “activities and payments must not be artificially

structured, split or aggregated to avoid application of the rules.”

196

194

See

letters from Bean; PWYP-US 1; Sen. Cardin et al.; and Sen. Lugar et al.

See also

letters from ACEP; Global Witness 1; and Oxfam 1.

195

See

letter from Bean.

196

See

letter from PWYP-US 1.

See also

letters from ACEP; Global Witness 1; and Oxfam 1.

3. Final Rules

We are adopting the proposed definition of “payment” with certain changes to the rule and related guidance. The definition we are adopting includes the specific types of payments identified in the statute as well as CSR payments that are required by law or contract, payments of certain dividends, and payments for infrastructure. As we noted in the Proposing Release, the statute and the EITI guidelines include most of the types of payments included in the definition.

197

Most of the components of our definition of “payment” are also used in the EU Directives and ESTMA. Thus, including them is consistent with the statutory directive for our rules to support international transparency promotion efforts.

197

See

EITI Standard, at 23.

In addition to the types of payments expressly included in the definition of payment in the statute, Section 13(q) provides that the Commission include within the definition “other material benefits” that it determines are “part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals.” According to Section 13(q), these “other material benefits” must be consistent with the EITI's guidelines “to the extent practicable.”

198

The other material benefits we have included in the final rules—CSR payments required by law or contract, dividends, and infrastructure payments—are all found in the EITI guidelines as well.

199

198

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

199

See

the EITI Standard at Sections 4.1(b) (dividends), 4.3 (infrastructure payments), and 6.1 (social expenditures).

Unlike with the 2012 Proposing Release, none of the commenters on the Proposing Release suggested a broad, non-exhaustive list of payment types or a category of “other material benefits.” In light of this, and because we continue to believe that Section 13(q) directs us to make an affirmative determination that the other “material benefits” are part of the commonly recognized revenue stream, we are not adopting such a non-exclusive list or category. Accordingly, under the final rules, resource extraction issuers will be required to disclose only those payments that fall within the specified list of payment types in the rules.

We have determined that the payment types specified in the rules 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 ESTMA also require most of these payment types to be disclosed.

200

In this regard, we also looked to the EITI and determined 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). As such, the final rules require disclosure of CSR payments that are required by law or contract, dividend, and infrastructure payments. We note that none of the commenters on the Proposing Release objected to the inclusion of dividend and infrastructure payment, while views were mixed on CSR payments. We also note that payments for infrastructure improvements have been required under the EITI since at least 2011,

201

payments for dividends since at least 2005,

202

and CSR payments that are required by law or contract since 2013.

203

200

See, e.g.,

EU Accounting Directive, Art. 41(5) and Section 2 of ESTMA (both including, as discussed in Section I.C above, the following payment types: Production entitlements, taxes, royalties, dividends, bonuses, fees, and infrastructure payments).

201

In February 2011, the EITI Board issued revised EITI rules that require participants to develop a process to disclose infrastructure payments under an EITI program.

See

EITI Rules 2011,

available at

http://eiti.org/document/rules.

See also

EITI Requirement 9(f) in EITI Rules 2011, at 22 (“Where agreements based on in-kind payments, infrastructure provision or other barter-type arrangements play a significant role in the oil, gas or mining sectors, the multi-stakeholder group is required to agree [to] a mechanism for incorporating benefit streams under these agreements in to its EITI reporting process. . . .”) and EITI Standard, at 24 (“The multi-stakeholder group and the independent administrator are required to consider whether there are any agreements, or sets of agreements, involving the provision of goods and services, including loans, grants and infrastructure works, in full or partial exchange for oil, gas or mining exploration or production concessions or physical delivery of such commodities. . . Where the multistakeholder group concludes that these agreements are material, the multistakeholder group and the Independent Administrator are required to ensure that the EITI Report addresses these agreements, providing a level of detail and transparency commensurate with the disclosure and reconciliation of other payments and revenues streams.”).

202

See

EITI, Source book, Chapter 2, Section D (Mar. 2005).

203

As is currently the case under the 2016 EITI Standard, the 2013 version of the EITI Standard required social contribution payments to be disclosed if the company was legally or contractually required to make those payments.

The proposed rules did not require the disclosure of CSR payments. We noted in the Proposing Release that other recently enacted international transparency promotion efforts, such as the EU Directives and ESTMA, do not include CSR payments as a specified covered payment type. Although we noted that the EITI includes the disclosure of material “social expenditures” in an EITI report when those expenditures are required by law or contract,

204

we stated that disclosure of CSR payments appeared to be outside of the scope of the more recent international efforts in the European Union and Canada.

205

In addition, we noted that there was no clear consensus among the commenters on whether the proposed rules should include CSR payments as part of identified payments that are required to be disclosed.

206

Nevertheless, we sought public input on the matter.

204

See

EITI Standard, at 28 (“Where material social expenditures by companies are mandated by law or the contract with the government that governs the extractive investment, the EITI Report must disclose and, where possible, reconcile these transactions.”).

205

See

EU Accounting Directive, Art. 41(5) and ESTMA, Section 2, both of which list types of payments covered by their respective disclosure regulations without including CSR payments.

But see

ESTMA Guidance, Section 3.5 (outlining that “payments made for corporate social responsibility purposes” may be required to be disclosed if “made in lieu of one of the payment categories that would need to be reported under [ESTMA]”).

206

See

Proposing Release, n.148 and accompanying text.

Upon further consideration of our approach in the proposed rules and taking into account the comments discussed above, we believe that CSR payments that are required by law or contract are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals.

207

As noted above, CSR payments that are required by law or contract must be disclosed under the EITI. Also, as noted by one commenter, “[p]ublic manifestations of how common in [the resource extraction] industry CSR payments have become include prolific conferences, studies, guidance, and compliance manuals.”

208

Notably, this view was not limited to academia or civil society organizations. One industry commenter also stated that CSR payments are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals, at least when required by law or contract.

209

Furthermore, there is other evidence supporting the significant role that CSR payments have in the extractive industries. For example, several EITI implementing countries already disclose mandatory or voluntary social expenditures in their EITI Reports.

210

In addition, several issuers already report their required or voluntary CSR payments.

211

We recognize that significant disclosure regimes such as the EU Directives and ESTMA do not include CSR payments as a specified covered payment type. Nonetheless, we find that the evidence on balance supports the conclusion that such payments are now part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals.

212

207

We note that our decision to require disclosure of such payments is further supported by the fact that such payments can be used as a mechanism for the corrupt or suspicious diversion of payment revenues to governmental officials for their personal use.

See, e.g.,

Ken Silverstein, The Secret World of Oil 79 (2014) (noting that “money specifically marked for social programs has been stolen” by the leaders of Equatorial Guinea and quoting a court filing by the U.S. Department of Justice that states: “The Inner Circle routinely demands that companies operating in E.G. contribute money to what are disguised as public service campaigns [to build housing and other social programs. However] the contributions are not used for their alleged purpose, but instead are largely taken by members of the Inner Circle . . . for their personal benefit.”) (bracketed additions were included in The Secret World of Oil).

208

See

letter from Broadman & Searby (noting publications such as IPIECA, Creating Successful, Sustainable Social Investment: Guidance document for the oil and gas industry (2008); Alison Colwell

of BSR, Driving Business and Social Benefits Through Inclusive Community Investment (July 2015); Anglo American Corp., Socio-Economic Assessment Toolbox, Version 3 (2013); FSG, “Shared Value In Extractives,” prepared materials for the Next-Gen CSR and Shared Value Forum (Feb. 2014); FSG, “Extracting with Purpose: Creating Shared Value in the Oil and Gas Band Mining Sectors' Companies and Communities” (Oct. 2014).

209

See

letter from ExxonMobil 1.

210

See

EITI Guidance, Note 17 (Apr. 24, 2014) (noting that Kazakhstan, Kyrgyzstan, Liberia, Mongolia, Mozambique, Peru, Republic of Congo, Togo, Yemen and Zambia require or reconcile social expenditures in their EITI reports).

211

See, e.g.,

Statoil ASA,

2015 Sustainability Report,

p. 29 (disclosing that in 2015 Statoil made NOK 37 million in social investments, of which NOK 5 million were contractual obligations); Newmont Mining Corporation,

Beyond the Mine-Our 2014 Social and Environmental Performance

(reporting that Newmont invested $28 million globally “to support a wide range of community investments”); Kosmos Energy Ltd.,

2014 Corporate Responsibility Report

(reporting that Kosmos Energy spent $2,936,000 in social investments in 2014); BHP Billiton Ltd., 2015 Sustainability Report (reporting that BHP's voluntary community investment totaled $225 million USD in 2015); and Tullow Oil plc,

2015 Corporate Responsibility Report

(disclosing that Tullow spent $7,537,000 on discretionary social projects in 2015).

212

One commenter questioned our conclusion in the Proposing Release that the European Union and Canada were consistent in generally not requiring disclosure of CSR payments, particularly with respect to Canada.

See

letter from Broadman & Searby. Although Canada does not list CSR payments as a separate payment type, the ESTMA Guidance states that “the onus is on the Reporting Entity to determine whether a voluntary or philanthropic payment does in fact relate in some way to its commercial development of oil, gas or minerals. This may include payments for corporate social responsibility purposes.” In this regard, the guidance also states that entities “should look to the substance, rather than the form, of payments in determining which [payment] category is applicable.” ESTMA Guidance, Section 3.5. The ESTMA Guidance further states that “payments made for corporate social responsibility purposes” may be required to be disclosed if “made to a payee in lieu of one of the payment categories that would need to be reported under [ESTMA].”

Id.

Finally, the ESTMA Guidance provides an example of how providing a local municipal government with a payment for a scholarship endowment and to build a community center should be reported under the bonus payment category.

Id.

at Box A.

We do not believe it is appropriate to add the other payment types recommended by some commenters because we have not determined that they are material benefits that are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals. With respect to commodity trading-related payments, we believe that our definition of “export” and the categories of payments in the final rules, particularly in-kind payments, accurately reflect the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals. We acknowledge that significant payments may be made by buying/trading companies and others to purchase the commodities covered by the final rules. Nevertheless, we do not believe that purchasing or trading oil, natural gas, or minerals, even at a level above the de minimis threshold, is on its own sufficiently related to the “commercial development” of those resources to be covered by the rules, particularly when the rules already require disclosure of in-kind payments of production entitlements. We have, however, addressed below how such production entitlements must be valued when initially made in-kind but subsequently purchased by the same issuer from the recipient government.

We are also not specifically requiring disclosure of payments for government expenses, providing jobs or tuition to persons related to government officials, investing in companies created by officials or related persons, or other similar payments that could reasonably raise corruption concerns. We find it unnecessary to do so because, when these payments are made to further the commercial development of oil, natural gas or minerals (in connection with or in lieu of the identified payments), they will already be covered by the anti-evasion provision we are adopting.

213

See generally

U.S. Senate Permanent Subcommittee on Investigations, Committee on Government Affairs, Money Laundering and Foreign Corruption: Enforcement and Effectiveness of the Patriot Act, Case Study Involving Riggs Bank Report, at 98-111 (July 14, 2004) (providing examples of the roles that resource extraction companies can play in facilitating the suspect or corrupt practices of foreign officials seeking to divert resource extraction payments that belong to the government).

With respect to payments for fines and penalties, we do not believe they relate sufficiently to the commercial development of natural resources to warrant inclusion. Although we acknowledge that the USEITI multi-stakeholder group has included penalties, we also note that the EITI Standard does not address the reporting of penalties or fines. In this regard, we understand that actual practice in countries applying the EITI Standard appears to vary depending on the particular interpretations of a country's multi-stakeholder group.

214

Furthermore, we note that neither the EU Directives nor ESTMA include fines or penalties as an explicit payment category.

214

Based upon our review of EITI reports published in English on the EITI Web site, many of the reports do not report payments of fines and penalties.

We are adopting the proposed approach to in-kind payments with one modification. In the past, many commenters supported the inclusion of in-kind payments, particularly in connection with production entitlements and none of the commenters on the Proposing Release objected to their inclusion in the rules.

215

We also note that the EU Directives and ESTMA require disclosure of in-kind payments.

216

In addition to production entitlements, in-kind payments could include building a road or school, refurbishing a government building, or numerous other activities that do not involve providing monetary payments to the host country government. Although certain commenters recommended allowing issuers to choose between reporting in-kind payments at cost or fair market value, we continue to believe that such disclosure would be more consistent and comparable if issuers are required to report in-kind payments at cost, and are only permitted to report using fair market value if historical costs are not reasonably available or determinable. We are providing guidance, however, on how to report payments made to a foreign government or the Federal Government to purchase the resources associated with production entitlements that are reported in-kind.

217

If the issuer must report an in-kind production entitlement payment under the rules and then repurchases the resources associated with the production

entitlement within the same fiscal year, the issuer must use the purchase price (rather than using the valuation methods described above) when reporting the in-kind value of the production entitlement. If the in-kind production entitlement payment and the subsequent purchase are made in different fiscal years and the purchase price is greater than the previously reported value of the in-kind payment, the issuer must report the difference in values in the latter fiscal year if that amount exceeds the de minimis threshold. In other situations, such as when the purchase price in a subsequent fiscal year is less than the in-kind value already reported, no disclosure relating to the purchase price is required. We believe that this approach more accurately captures the value of in-kind payments for production entitlements than the proposed approach and addresses commenters concerns without adding significantly to the burden of resource extraction issuers.

215

See

2012 Adopting Release, nn.170, 211 and accompanying text. In-kind payments include, for example, making a payment to a government in oil rather than a monetary payment.

216

Article 41 of the EU Accounting Directive and Section 2 of ESTMA specifically include “in kind” payments in their definitions of “payment.”

217

See

Instruction 11 to Item 2.01 of Form SD.

We have also considered whether to require issuers to report the volume of in-kind payments. As discussed above, commenters were divided on this suggestion.

218

We generally agree with the commenter that stated such information was unnecessary.

219

Based on these considerations, we are not requiring disclosure related to volume. We note that issuers are required to provide a brief description of how the monetary value was calculated, which will provide some additional context for assessing the reasonableness of the disclosure.

218

See

Section II.C.2 above.

219

See

letter from ExxonMobil 2.

We are adopting as proposed an instruction setting forth a non-exclusive list of fees (rental fees, entry fees, and concession fees) and bonuses (signature, discovery, and production bonuses). As discussed in the Proposing Release, the EITI specifically mentions these types of fees and bonuses as payments that should be disclosed by EITI participants.

220

This supports our view that these types of fees and bonuses are part of the commonly recognized revenue stream. As recommended by certain commenters, we are also adding a non-exclusive list of royalties since we believe that would provide additional clarity for issuers.

221

Thus, the term “royalties” would include, but not be limited to, unit-based, value-based, and profit-based royalties.

222

Of course, resource extraction issuers may be required to disclose other types of fees, bonuses, and royalties depending on the particular facts and circumstances.

220

See

EITI Standard, at 23.

221

See

Instruction 9 to Item 2.01 of Form SD.

See also

letter from PWYP-US 1.

222

These types of royalties were recommended by PWYP-US based on the following publication: World Bank,

Mining Royalties: Their Impact on Investors, Government and Civil Society

(2006), pp. 50-54,

available at

http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2006/09/11/000090341_20060911105823/Rendered/PDF/372580Mining0r101OFFICIAL0USE0ONLY1.pdf

In response to commenters' concerns about compliance costs, we noted in the Proposing Release that issuers would not be required to have the payment information audited or reported on an accrual basis.

223

As noted above, one commenter questioned whether this was a shift from the position taken in prior staff guidance, which indicates that issuers are not permitted to provide the payment information on an accrual basis.

224

We have revised Form SD to expressly state that the payment information need not be audited and must be made on a cash basis. As we discussed in the 2012 Adopting Release, we believe that this is the best approach because (1) these payment disclosures are largely cash-based, so reporting them on a cash basis will not result in a significant compliance burden, and (2) requiring a consistent approach will improve comparability and therefore result in greater transparency.

223

See

Section II.G.5 of the Proposing Release.

224

Resource Extraction FAQ 7,

available at

https://www.sec.gov/divisions/corpfin/guidance/faq.htm

We are adopting the proposed definition of “not de minimis” for the reasons stated in the Proposing Release. A “not de minimis” payment is one that equals or exceeds $100,000, or its equivalent in the issuer's reporting currency,

225

whether made as a single payment or series of related payments. We continue to believe that this definition provides a clear standard for determining which payments a resource extraction issuer must disclose. Furthermore, several countries have established payment thresholds that approximate the proposed $100,000 standard.

226

We believe that the establishment of a similar payment threshold by these countries diminishes any potential additional compliance burden and potential competitive harm that otherwise could be caused by disclosure rules that include a payment threshold that varies significantly from the standard used in other jurisdictions. As discussed above, only one of the many commenters that addressed the definition thought that the reporting threshold was too low.

227

Although we acknowledge this commenter's concerns that the threshold might be considered low for companies working on “massive” scale projects, we note that none of the large issuers commenting on the Proposing Release expressed similar concerns. For this reason and the reasons stated above, we are not increasing the threshold.

225

Instruction 2 to Item 2.01 allows an issuer to choose several methods to calculate currency conversions for payments not made in U.S. dollars or the issuer's reporting currency. We have clarified in that instruction that the same methods are available to issuers when calculating whether a payment not made in U.S. dollars exceeds the de minimis threshold. However, an issuer must use a consistent method for such de minimis payment currency conversions and must disclose which method it used.

226

See

EU Accounting Directive, Art. 43(1) and Recital 46 (using €100,000, or approximately $112,280 (USD) as of June 16, 2016); UK Reports on Payments to Governments Regulations 2014 (2014 Statutory Instrument No. 3209), Part 1, 5.-(3) (using £86,000, or approximately $122,180 (USD) as of June 16, 2016); Norwegian Regulations, Section 3 (using 800,000 kr, or approximately $95,302 (USD) as of June 16, 2016); and ESTMA, Section 9(2) (using $100,000 (CAD), or approximately $77,140 (USD) as of June 16, 2016).

227

See

letter from Nouveau. Comments received prior to the Proposing Release were divided on whether the threshold should be increased or decreased.

See

Section II.C.2 of the Proposing Release for a discussion of those comments.

Finally, despite the changes recommended by commenters, we are adopting the anti-evasion provision as proposed. Thus, the final rules 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).

228

This provision is designed and intended to emphasize substance over form or characterization and to capture any and all payments made for the purpose of evasion. Accordingly, we believe that it covers most of the situations that appeared to concern commenters. For example, the provision would cover payments that were substituted for otherwise reportable payments in an attempt to evade the disclosure rules,

229

as well as activities and payments that were structured, split, or aggregated in an attempt to avoid application of the rules.

230

Similarly, as noted in the Proposing Release, a resource extraction issuer could not avoid disclosure by re-characterizing an activity as transportation that would otherwise be covered under the rules, or by making a payment to the government via a third party in order to avoid disclosure under the proposed rules.

228

See

Rule 13q-1(b).

229

See

letter from Bean.

230

See, e.g.,

letter from PWYP-US 1.

D. Definition of “Subsidiary” and “Control”

1. Proposed Rules

In addition to requiring an issuer to disclose its own payments, Section 13(q) also requires a resource extraction issuer to disclose payments by a subsidiary or an entity under the control of the issuer made to a foreign government or the Federal Government relating to the commercial development of oil, natural gas, or minerals. The proposed rules defined the terms “subsidiary” and “control” using accounting principles rather than other alternatives, such as using the definitions of those terms provided in Rule 12b-2.

231

Under Exchange Act Rule 12b-2 [17 CFR 240.12b-2], “control” (including the terms “controlling,” “controlled by” and “under common control with”) is defined to mean “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract, or otherwise.” Rule 12b-2 also defines a “subsidiary” of a specified person as “an affiliate controlled by such person directly, or indirectly through one or more intermediaries.”

See also

the definitions of “majority-owned subsidiary,” “significant subsidiary,” and “totally-held subsidiary” in Rule 12b-2.

Within the context of the proposed rules, a resource extraction issuer would have “control” of another entity if the issuer consolidated that entity or proportionately consolidated an interest in an entity or operation under the accounting principles applicable to the financial statements it includes in periodic reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act. Thus, for determining the eligible payments, or portions thereof, that must be disclosed, the resource extraction issuer would follow the consolidation requirements under generally accepted accounting principles in the United States (“U.S. GAAP”) or under the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”), as applicable.

232

The extent to which the entity making the eligibility payment is consolidated would determine the extent to which payments made by that entity must be disclosed. For example, a resource extraction issuer that proportionately consolidates an interest in an entity or an operation would be required to disclose the issuer's proportionate amount of that entity's or operation's eligible payments indicating the issuer's proportionate interest.

232

See

Accounting Standards Codification (“ASC”) 810,

Consolidation,

IFRS 10,

Consolidated Financial Statements

and IFRS 11,

Joint Arrangements

for guidance. A foreign private issuer that prepares financial statements according to a comprehensive set of accounting principles, other than U.S. GAAP or IFRS, and files with the Commission a reconciliation to U.S. GAAP would be required to determine whether or not an entity is under its control using U.S. GAAP.

2. Comments on the Proposed Rules

In the Proposing Release we solicited comment on how the term “control” should be defined. For example, we asked whether it was preferable to base the definition of “control” on applicable accounting principles, rather than using Rule 12b-2 of the Exchange Act, and whether there would be significant differences between these approaches. We also asked whether we should allow resource extraction issuers to report eligible payments made by proportionately consolidated entities on a proportionate basis. Finally, we solicited comment on whether there were any aspects of other international transparency initiatives or differences between U.S. GAAP and IFRS that we should address so as to promote the comparability of this type of disclosure.

All of the commenters addressing this aspect of the proposal generally supported using accounting consolidation principles instead of Rule 12b-2.

233

Several of these commenters, however, stated that using accounting principles would be acceptable only if the concept of “significant influence” was used in conjunction with proportional consolidation.

234

These commenters expressed concern that proportional consolidation is optional for oil and gas companies under U.S. GAAP and is rarely used. They were also concerned that companies might structure joint ventures to avoid disclosure. Other commenters disagreed with adding a “significant influence” concept to the definition of control.

235

For example, one expressed concerns about the ability to access payment-level financial information from an entity over which it only had “significant influence.”

236

Another commenter stated that there was no support for the assertion that joint ventures would be structured to avoid disclosure and that any reporting gap is inherent to Section 13(q), which applies only to companies subject to the Commission's jurisdiction.

237

233

See

letters from API 1; BP; Chevron Corporation (Feb. 16, 2016) (“Chevron”); Encana; ExxonMobil 1; Petrobras; PWYP-US 1; and Royal Dutch Shell plc (Feb. 5, 2016) (“RDS”).

See also

letters from ACEP; Global Witness; and Oxfam 1.

234

See

letter from PWYP-US 1.

See also

letters from ACEP; Global Witness 1; and Oxfam 1.

235

See

letters from API 2 and ExxonMobil 2.

236

See

letter from ExxonMobil 2.

237

See

letter from API 2.

Several of the commenters that otherwise supported the proposed approach had concerns about using proportional consolidation to determine control.

238

These commenters were generally concerned that issuers who use proportional consolidation might not have access to the required payment information from operators of existing joint ventures. These commenters stated that issuers have access only to high-level data regarding revenues and costs of the proportionally consolidated entities or operations. One of these commenters was concerned that the resulting disclosure could be confusing or misleading because there will be situations where an issuer has multiple operations with different ownership interests that would be both operationally and geographically interconnected and therefore would be classified as a single project for reporting purposes.

239

Another recommended addressing this issue by clarifying that Rule 12b-21 would permit an issuer to exclude information with respect to entities where the issuer does not have access to the information required to be disclosed.

240

238

See

letters from API 1; BP; Chevron; Encana; ExxonMobil 1; Petrobras; and RDS.

239

See

letter from ExxonMobil 1.

240

See

letter from RDS.

Several of the commenters who had concerns with proportional consolidation for determining “control” recommended that when the payments relate to joint ventures the rules should only require disclosure of payments by the operator of the joint venture.

241

Under this recommendation, the operator would report all of the eligible payments it makes, rather than its proportional share. A number of these commenters indicated that this approach would be more consistent with the requirements under the EITI, EU Directives, and ESTMA.

242

One of these commenters recommended specific changes to the rules and instructions that it stated would accomplish this purpose and would clarify that “control” extends down an organizational chain to entities controlled by other controlled entities.

243

Other commenters acknowledged that this recommended change to the Commission's proposed definition of “control” could result in payments not being reported when the operator of a joint venture is not subject to the rules, even if minority partners in the joint venture are subject to the rules.

244

These commenters stated,

however, that a similar gap in coverage would exist under the proposed definition when a company subject to the rule is the operator in a joint venture but the joint venture partners are not subject to the reporting requirement. In that situation, these commenters stated that the operator would be required to report only its own proportional share of the payment made to the host government.

241

See

letters from API 1; BP; Chevron; Encana; ExxonMobil 1; and Petrobras.

242

See

letters from API 1; BP; Chevron; Encana; and ExxonMobil 1.

243

See

letter from Encana.

244

See, e.g.,

letter from API 2.

3. Final Rules

We are adopting the proposed definitions of “subsidiary” and “control.” We continue to believe that using accounting principles to determine control, rather than Rule 12b-2, is appropriate in light of the significant international developments since the 2012 Rules were vacated. Specifically, this approach, although not identical, complements two major international transparency regimes, the EU Directives and ESTMA, and should therefore support international transparency promotion efforts by fostering consistency and comparability of disclosed payments.

245

Also, as noted above, all of the commenters that addressed this aspect of the proposed rules generally supported using accounting principles to define “control.”

245

See, e.g.,

EU Accounting Directive, Art. 44 (providing for the preparation of consolidated reports, subject to limited exceptions). ESTMA provides that “control” includes both direct and indirect control, but Section 2.1.3 of the ESTMA Guidance states that “[w]here one business controls another enterprise under the accounting standards applicable to it . . . that will generally be sufficient evidence of control for purposes of the Act.”

We believe that the definition we are adopting today better balances transparency for users of the payment disclosure and the burden on issuers than the use of the Rule 12b-2 definition of “control” or alternatives recommended by commenters. Issuers already apply the concept of control for financial reporting purposes, which should facilitate compliance. Assuming a reporting issuer consolidates the entity making the eligible payment,

246

this approach also should have the benefit of limiting the potential overlap of the disclosed payments because generally, under applicable financial reporting principles, only one party can control, and therefore consolidate, that entity. Further, this approach may enhance the quality of the reported data since each resource extraction issuer is required to provide audited financial statement disclosure of its significant consolidation accounting policies in the notes to the audited financial statements included in its existing Exchange Act annual reports.

247

The disclosure of these accounting policies should provide greater transparency about how the issuer determined which entities and payments should be included within the scope of the required disclosures. Finally, a resource extraction issuer's determination of control under the final rules is subject to the audit process as well as to the internal accounting controls that issuers are required to have in place with respect to reporting audited financial statements filed with the Commission.

248

246

See below for a discussion of a resource extraction issuer's disclosure obligations concerning proportionately consolidated entities or operations.

247

See

ASC 235-10-50; IFRS 8.

See also

Rules 1-01, 3-01, and 4-01 of Regulation S-X [17 CFR 210.1-01, 2-01 and 4-01].

248

See

Exchange Act Section 13(b)(2)(B) [15 U.S.C. 78m(b)(2)(B)].

See also

Rules 13a-15 [17 CFR 240.13a-15] and 15d 15 [17 CFR 240.15d-15]. We note, however, that the proposed rules would not create a new auditing requirement.

We considered the recommendation of some commenters to include a “significant influence” test for determining control in addition to the accounting consolidation principles we proposed. We do not believe, however, that we should define control such that significant influence by itself would constitute control.

249

The concept of significant influence does not reflect the same level of ability to direct or control the actions of an entity that is generally reflected in the concept of consolidation. As such, we believe that the consolidation principles are better aligned with the purposes underlying Section 13(q) than a significant influence test. Moreover, unlike a potential significant influence test, the consolidation principles used to define control for the purposes of Section 13(q) more closely capture the situations where the resource extraction issuer has access to the information that is required to be reported.

250

We also note that the European and Canadian reporting regimes do not measure control based on “significant influence” alone. For these reasons, we have chosen not to include a significant influence test in the final rules.

249

In this regard, we note that under U.S. GAAP and IFRS, significant influence alone does not represent a level of control that would result in consolidation.

See

ASC 323-10-15, paragraphs 6 through 11 and IAS 28, paragraph 3.

250

Compared to an issuer that consolidates an entity, an issuer applying proportionate consolidation may not have the same level of ability to direct the entity or operations making the eligible payments. However, an issuer applying proportionate consolidation has a direct or undivided ownership in the assets and liabilities of the entity or operations, and the issuer's ability to apply proportionate consolidation indicates a higher likelihood that it is able to obtain the information necessary to satisfy the reporting requirements.

The final rules also require disclosure of the proportionate amount of the eligible payments made by a resource extraction issuer's proportionately consolidated entities or operations. We believe this approach is consistent with using accounting principles to determine control because, when proportionate consolidation is applied, an entity has an undivided interest in or contractual rights and obligations in specified assets, liabilities and operations. Under this approach, the proportionate amount of eligible payments reported by the issuer reflects the underlying interest in the economics associated with the specified assets, liabilities, and operations. Although we acknowledge commenters' concerns about the ability of an issuer to obtain sufficiently detailed payment information from proportionately consolidated entities or operations when it is not the operator of that venture, we note that the delayed compliance date in the final rules will provide issuers two years to make arrangements with joint venture operators to obtain the required payment information. If, after reasonable effort, the issuer is unable to obtain such information, it would be able to rely on Exchange Act Rule 12b-21 to omit the information if the information is unknown and not reasonably available.

251

We expect, however, that for future joint ventures, non-operator issuers can and should negotiate for access to the appropriate information.

251

17 CFR 240.12b-21. Specifically Rule 12b-21 states that information required need be given only insofar as it is known or reasonably available to the registrant. If any required information is unknown and not reasonably available to the registrant, either because the obtaining thereof would involve unreasonable effort or expense, or because it rests peculiarly within the knowledge of another person not affiliated with the registrant, the information may be omitted. The rule goes on to provide two additional conditions. The first is that the registrant must give such information on the subject that it possesses or can acquire without unreasonable effort or expense, together with the sources of that information. The second is that the registrant must include a statement either showing that unreasonable effort or expense would be involved or indicating the absence of any affiliation with the person within whose knowledge the information rests and stating the result of a request made to such person for the information.

E. Definition of “Project”

1. Proposed Rules

We proposed requiring a resource extraction issuer to disclose payments made to governments relating to the commercial development of oil, natural gas, or minerals by type and total

amount per project.

252

The proposed definition of “project” was modeled on the definition found in the EU Directives and the ESTMA Specifications, albeit modified to provide resource extraction issuers with additional flexibility on how to treat operations involving multiple, related contracts.

252

See

Section II.E of the Proposing Release.

Similar to the EU Directives and the ESTMA Specifications, we proposed to define “project” as operational activities that are governed by a single contract, license, lease, concession, or similar legal agreement, which form the basis for payment liabilities with a government.

253

The proposed definition was also similar to the EU Directives and the ESTMA Specifications in allowing issuers to treat multiple agreements that are both operationally and geographically interconnected as a single project.

254

Unlike the EU Directives and Canadian definitions, however, our proposed definition of “project” provided additional flexibility to issuers by excluding a requirement that the agreements have “substantially similar terms.”

253

See

proposed Item 2.01(c)(10) of Form SD.

254

Id.

In order to assist resource extraction issuers in determining whether two or more agreements may be treated as a single project, we proposed an instruction that provided a non-exclusive list of factors to consider when determining whether agreements are “operationally and geographically interconnected” for purposes of the definition of project. No single factor was necessarily determinative. Those factors included: Whether the agreements related to the same resource and the same or contiguous part of a field, mineral district, or other geographic area; whether they were performed by shared key personnel or with shared equipment; and whether they were part of the same operating budget.

255

Furthermore, we proposed an instruction stating that issuers were not required to disaggregate payments that are made for obligations levied on the issuer at the entity level rather than the project level.

256

255

See

proposed Instruction 12 to Item 2.01 of Form SD.

256

See

proposed Instruction 4 to Item 2.01 of Form SD.

2. Comments on the Proposed Rules

In the Proposing Release we solicited comment on many possible approaches to defining the term “project,” as well as the broader question of whether we should define “project” at all. We sought public comment on how best to craft a definition that advanced the U.S. governmental interest in combatting global corruption and promoting public accountability with respect to extractive resources. Specifically, we asked about alternative definitions found in other jurisdictions, such as the European Union and Canada, as well as the API's proposed definition. We asked commenters to consider how alternative definitions might enhance transparency and the comparability of data. For example, we asked whether we should align our definition more closely with the EU Directives and ESTMA and whether there was an alternative to a contract-based definition of “project” that would be preferable. We also asked commenters about specific aspects of the proposed rules, such as under what circumstances should the rules allow for multiple agreements to be aggregated as a single project.

Numerous commenters supported the statute's directive to require disclosure at the project level.

257

Many other commenters supported defining “project” in relation to a legal agreement, such as a contract, lease, license, or concession, consistent with the definition in the European Union and Canada.

258

A number of other commenters specifically supported the proposed definition.

259

One of these commenters stated that project-level disclosure by contract was necessary to evaluate and implement effective oil and mineral revenue sharing policies in Ghana.

260

USAID stated that the EITI standard also encourages public disclosure of the details of contracts and licenses that provide the terms for the exploitation of oil, gas, and minerals.

261

257

See

letters from Peck & Chayes; Quinones; Sen. Cardin et al.; Sen. Lugar et al.; and Form Letter A.

258

See

Form Letter B.

259

See

letters from ACEP; ACTIAM NV, AP1/Första AP-Fonden (First Swedish National Pension Fund), Andra AP2-Fonden (Second Swedish National Pension Fund), AP3/Tredje AP-Fonden (Third Swedish National Pension Fund), AP4/Fjärde AP-Fonden (Fourth Swedish National Pension Fund), Aviva Investors, Bâtirente, BMO Global Asset Management, BNP Paribas Investment Partners, British Columbia Investment Management Corporation, California State Teachers' Retirement System (CalSTRS), Calvert Investments, Cartica Capital, Ethos Foundation, Switzerland, Henderson Global Investors, Hermes Equity Ownership Services Ltd., Legal & General Investment Management, NEI Investments, RPMI Railpen I

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