# Disclosure of Payments by Resource Extraction Issuers > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2019-28407 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** January 15, 2020 - **Citation:** 85 FR 2522 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240 and 249b [Release No. 34-87783; File No. S7-24-19] RIN 3235-AM06 Disclosure of Payments by Resource Extraction Issuers AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: We are proposing Rule 13q-1 and an amendment to Form SD to implement Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) relating to disclosure of payments by resource extraction issuers. Section 1504 of the Dodd-Frank Act added Section 13(q) to the Securities Exchange Act of 1934. Section 13(q) directs the Commission to issue rules requiring resource extraction issuers to include in an annual report information relating to payments made 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 these issuers to provide information about the type and total amount of payments made for each of their projects 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: Comments should be received by March 16, 2020. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's internet comment forms ( http://www.sec.gov/rules/proposed.shtml ); or • Send an email to rule-comments@sec.gov . Please include File Number S7-24-19 on the subject line. Paper Comments • Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-24-19. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. We will post all comments on our internet website ( http://www.sec.gov/rules/proposed.shtml ). Comments also are available for website viewing and printing in our Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. We or the staff may add studies, memoranda or other substantive items to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Elliot Staffin, Special Counsel, Office of Rulemaking, Division of Corporation Finance, at (202) 551-3430, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission initially adopted Rule 13q-1 and amendments to Form SD on August 22, 2012. Those rules were vacated by the U.S. District Court for the District of Columbia on July 2, 2013. On June 27, 2016, the Commission adopted a revised version of Rule 13q-1 and amendments to Form SD. On February 14, 2017, the revised rules were disapproved by a joint resolution of Congress pursuant to the Congressional Review Act. Although the joint resolution vacated the 2016 Rules, the statutory mandate under Section 13(q) of the Exchange Act remains in effect. As a result, we are proposing 17 CFR 240.13q-1 (“Rule 13q-1”) and an amendment to Form SD 1 under the Securities Exchange Act of 1934 (“Exchange Act”). 2 1 17 CFR 249b.400. 2 15 U.S.C. 78a et seq. Table of Contents I. Background A. Section 13(q) of the Exchange Act B. International Transparency Promotion Efforts C. The 2016 Rulemaking and Congress's Actions Under the CRA 1. Key Aspects of the 2016 Rules 2. Congressional Disapproval Under the CRA 3. Proposed Rules in Response to the CRA Disapproval II. Proposed Rules Under Section 13(q) A. Definition of “Resource Extraction Issuer” B. Definition of “Commercial Development of Oil, Natural Gas, or Minerals” 1. “Extraction” and “Processing” 2. “Export” 3. “Minerals” C. Definition of “Payment” 1. Taxes 2. Royalties, Fees, and Bonuses 3. Dividend Payments 4. Infrastructure Payments 5. Community and Social Responsibility Payments 6. In-Kind Payments 7. Other Payment Types 8. Accounting Considerations 9. The “Not De Minimis” Threshold D. Anti-Invasion E. Definition of “Subsidiary” and “Control” F. Definition of “Project” 1. Considerations for Modified “Project” Definition 2. Discussion of the Modified “Project” Definition G. Definition of “Foreign Government” and “Federal Government” H. Annual Report Requirement I. Public Reporting 1. Public Disclosure of the Issuer's Payment Information, Including the Company Name 2. Public Compilation J. Exemptions From Compliance 1. Exemption for Conflicts of Law 2. Exemption for Conflicts With Pre-Existing Contracts 3. Exemption for Smaller Reporting Companies and Emerging Growth Companies 4. Targeted Exemption for Payments Related to Exploratory Activities 5. Transitional Relief for Recently Acquired Companies 6. Transitional Relief for Initial Public Offerings 7. Case-by-Case Exemption K. Exhibits and Interactive Data Format Requirements L. Alternative Reporting M. Treatment for Purposes of the Exchange Act and Securities Act N. Compliance Date O. General Request for Comment III. Economic Analysis A. Introduction and Baseline B. Potential Benefits Resulting From the Payment Reporting Requirement C. Potential Costs Resulting From the Payment Reporting Requirement D. Discussion of Discretionary Choices 1. Definition of “Project” 2. Exemptions From Disclosure 3. Annual Report Requirement 4. Public Availability of Data 5. Alternative Reporting 6. Definition of “Control” 7. Definition of “Commercial Development of Oil, Natural Gas, or Minerals” 8. Types of Payments 9. Definition of “Not De Minimis” 10. Exhibit and Interactive Data Requirement 11. Quantitative Estimates of Costs Resulting From the Proposed Rulemaking IV. Paperwork Reduction Act A. Background B. Estimate of Issuers C. Estimate of Issuer Burdens D. Request for Comment V. Small Business Regulatory Enforcement Fairness Act VI. Regulatory Flexibility Act Certification VII. Statutory Authority and Text of Proposed Rule and Form Amendments I. Background A. Section 13(q) of the Exchange Act Section 13(q) was added to the Exchange Act in 2010 by Section 1504 of the Dodd-Frank Act. 3 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. The information must include: (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. 4 3 Public Law 111-203 (July 21, 2010). 4 15 U.S.C. 78m(q)(2)(A). As discussed further below, Section 13(q) also specifies that the Commission's rules must require certain information to be provided in an interactive data format. On August 22, 2012, the Commission adopted Rule 13q-1 and amendments to Form SD (the “2012 Rules”) as mandated by Section 13(q) of the Exchange Act. 5 The 2012 Rules were vacated by the U.S. District Court for the District of Columbia on July 2, 2013. 6 On June 27, 2016, the Commission adopted a revised version of Rule 13q-1 and amendments to Form SD (the “2016 Rules”) that addressed the concerns raised in the prior litigation. 7 On February 14, 2017, the 2016 Rules were disapproved by a joint resolution 8 of Congress pursuant to the Congressional Review Act (the “CRA”). 9 We are proposing a new Rule 13q-1 and amendments to Form SD to implement Section 13(q). 10 5 See Release No. 34-67717 (Aug. 22, 2012) [77 FR 56365 (Sept. 12, 2012)] (the “2012 Rules Adopting Release”) available at http://www.sec.gov/rules/final/2012/34-67717.pdf . See also Release No. 34-63549 (Dec. 15, 2010) [75 FR 80978 (Dec. 23, 2010)] (the “2012 Rules Proposing Release”) available at http://www.sec.gov/rules/proposed/2010/34-63549.pdf . 6 See API v. SEC, 953 F. Supp. 2d 5 (D.D.C. July 2, 2013). The District 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. See 953 F. Supp. 2d at 17-19 and 21-23. 7 See Release No. 34-78167 (June 27, 2016) [81 FR 49359 (July 27, 2016)] available at https://www.sec.gov/rules/final/2016/34-78167.pdf (the “2016 Rules Adopting Release”). See also Release No. 34-76620 (Dec. 11, 2015) [80 FR 80057 (Dec. 23, 2015)] available at https://www.sec.gov/rules/proposed/2015/34-76620.pdf (the “2016 Rules Proposing Release”). Unless otherwise indicated, comment letters referenced in this release were submitted in connection with the 2016 Rules. 8 See H.R.J. Res. 41, 115th Cong. (2017) (enacted). 9 5 U.S.C. 801 et seq. 10 Although the joint resolution vacated the 2016 Rules, the statutory mandate under Section 13(q) remains in effect. We discuss the CRA's requirements for subsequent rulemaking in connection with disapproved rules in Section I.C.2. below. Section 13(q) defines several key terms: • “Resource extraction issuer” means an issuer that is required to file an annual report with the Commission and engages in the commercial development of oil, natural gas, or minerals; 11 11 15 U.S.C. 78m(q)(1)(D). • “Commercial development of oil, natural gas, or minerals” includes exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity, as determined by the Commission; 12 12 15 U.S.C. 78m(q)(1)(A). • “Foreign government” means a foreign government, a department, agency or instrumentality of a foreign government, or a company owned by a foreign government, as determined by the Commission; 13 and 13 15 U.S.C. 78m(q)(1)(B). • “Payment” means a payment that: ○ Is made to further the commercial development of oil, natural gas, or minerals; ○ Is not de minimis; and ○ Includes taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits, that the Commission, consistent with the guidelines of the Extractive Industries Transparency Initiative (the “EITI”) 14 (to the extent practicable), determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals. 15 14 The EITI is a voluntary coalition of oil, natural gas, and mining companies, foreign governments, investor groups, and other international organizations committed to establishing a global standard (the “EITI Standard”) for the good governance of oil, gas, and mineral resources. The coalition was formed with industry participation and describes itself as being dedicated to fostering and improving transparency and accountability in resource-rich countries through the publication and verification of company payments and government revenues from oil, natural gas, and mining. See Implementing EITI for Impact—A Handbook for Policymakers and Stakeholders (2012) (“EITI Handbook”), at xii. After volunteering to become an EITI candidate, a country must implement a series of requirements set forth in the EITI Standard and complete an EITI validation process to become a compliant member. Although the United States became an EITI candidate country in March 2014, it withdrew its EITI candidacy in November 2017. See infra Section II.B. 15 15 U.S.C. 78m(q)(1)(C). Section 13(q) specifies that “[t]o the extent practicable, the rules . . . . shall support the commitment of the Federal Government to international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals.” 16 Although the statutory definition of “payment” explicitly refers to the EITI, the provision in Section 13(q) about supporting the Federal Government's commitment to international transparency promotion efforts does not mention the EITI. 17 16 15 U.S.C. 78m(q)(2)(E). 17 See id. Pursuant to Section 13(q), the rules must require a resource extraction issuer to submit the payment information included in an annual report in an interactive data format 18 using an interactive data standard established by the Commission. 19 Section 13(q) defines “interactive data format” to mean an electronic data format in which pieces of information are identified using an interactive data standard. 20 It also defines “interactive data standard” as a standardized list of electronic tags that mark information included in the annual report of a resource extraction issuer. 21 Section 13(q) also requires that the rules include electronic tags that identify, for any payments made by a resource extraction issuer to a foreign government or the Federal Government: 18 15 U.S.C. 78m(q)(2)(C). 19 15 U.S.C. 78m(q)(2)(D). 20 15 U.S.C. 78m(q)(1)(E). 21 15 U.S.C. 78m(q)(1)(F). • The total amounts of the payments, by category; • The currency used to make the payments; • The financial period in which the payments were made; • The business segment of the resource extraction issuer that made the payments; • The government that received the payments and the country in which the government is located; and • The project of the resource extraction issuer to which the payments relate. 22 Section 13(q) further authorizes the Commission to require additional electronic tags that it determines are necessary or appropriate in the public interest or for the protection of investors. 23 22 15 U.S.C. 78m(q)(2)(D)(ii). 23 Id. In addition, Section 13(q) requires, to the extent practicable, that the Commission make publicly available online a compilation of the information required to be submitted by resource extraction issuers under the rules. 24 The statute does not define the term compilation. 24 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 . . .” 25 25 15 U.S.C. 78m(q)(2)(F). Congress enacted Section 1504 of the Dodd-Frank Act 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. According to Senator Richard Lugar, who co-sponsored the amendment that was the basis for this statutory provision, a goal of requiring transparency was to provide more information to the global commodity markets and “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.” 26 26 See 156 Cong. Rec. S3816 (daily ed. May 17, 2010). B. International Transparency Promotion Efforts In 2013, the European Parliament and Council of the European Union (“EU”) adopted two directives that include payment disclosure rules. 27 The EU Accounting Directive and the EU Transparency Directive (the “EU Directives”) are very similar in content. Both determine the applicability and scope of the disclosure requirements and set the baseline in each EU member state and European Economic Area (“EEA”) 28 country for annual disclosure requirements for oil, gas, mining, and logging companies concerning the payments made to governments on a per country and per project basis. 29 All EU member states have implemented both of the EU Directives. 30 Norway has also adopted regulations similar to the EU Directives. 31 27 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 of the European Parliament and of the Council on the harmonization of 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 Directive 2007/14/EC on the implementation of certain provisions of Directive 2004/109/EC (“EU Transparency Directive”). 28 See European Commission Memo (June 12, 2013) (“New disclosure requirements for the extractive industry and loggers of primary forests in the Accounting (and Transparency) Directives (Country by Country Reporting)—frequently asked questions”). The EEA is composed of the EU member states plus Iceland, Liechtenstein, and Norway. 29 The EU Accounting Directive regulates disclosure 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, and requires covered oil, gas, mining, and logging companies to disclose specified payments to governments. See Article 3(4) of the EU Accounting Directive, which defines “large undertakings” ( i.e., large companies) to mean those which on their balance sheet dates exceed at least two of the three following criteria: (a) Balance sheet totaling €20 million; (b) net turnover of €40 million; and (c) average number of employees of 250. 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. See EU Transparency Directive, Art. 2(1)(d) and Art. 6. 30 Resource extraction issuers commenced filing reports under the EU Directives for 2015 and have since annually filed such reports. According to the National Resource Governance Institute (“NRGI”), approximately 90 U.K.-reporting companies have entered their fourth annual round of public payments to governments disclosures in 2019. See NRGI, U.K. Financial Regulator Confirms Extractive Companies Must Name Government Entities to Which They Make Payments (April 25, 2019), available at https://resourcegovernance.org/blog/uk-financial-regulator-confirms-extractive-companies-must-name-govts-they-pay ; see also BHP Billiton's Economic Contribution Report 2018, available at https://www.bhp.com/investor-centre/-/media/documents/investors/annual-reports/2018/bhpeconomiccontributionreport2018.pdf ; BP p.l.c.'s Report on Payments to Governments for the year ended December 31, 2018, available at https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/sustainability/group-reports/bp-report-on-payments-to-governments-2018.pdf ; and Royal Dutch Shell's Payments to Governments Report for the Year 2017, available at https://www.shell.com/sustainability/transparency/payments-to-governments/_jcr_content/par/textimage.stream/1554163266774/0354390d1d06f4fe154700810bc50102817feb82/royal-dutch-shell-the-payments-to-governments-report-for-the-year-2018.pdf . 31 See PWYP-Norway, Norwegian Regulations concerning country-by-country reporting (Feb. 24, 2014), available at http://www.publishwhatyoupay.no/en/node/16414, which provides an English translation of the Norwegian source document, Forskrift om land-for-land rapportering (Dec. 20, 2013), available at https://www.regjeringen.no/no/dokumenter/forskrift-om-land-for-land-rapportering/id748525/ . Canada adopted a Federal resource extraction disclosure law, the Extractive Sector Transparency Measures Act (“ESTMA”), which went into effect on June 1, 2015. 32 In March 2016, Canada finalized its ESTMA Guidance 33 and the ESTMA Technical Reporting Specifications (“ESTMA Specifications”), which provide guidelines for complying with the ESTMA disclosure regime. 34 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. 35 Public reporting under ESTMA was required for fiscal years beginning after June 1, 2015. 36 32 See ESTMA, 2014 S.C., ch. 39, s. 376 (Can.). 33 ESTMA Guidance available at https://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/mining-materials/PDF/ESTMA%E2%80%93Guidance.pdf . 34 ESTMA Specifications available at https://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/mining-materials/PDF/ESTMA%E2%80%93TRS.pdf . 35 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, (ii) it has generated at least $40 million (CAD) in revenue, (iii) it employs an average of at least 250 employees; and (c) any other prescribed entity. ESTMA, Section 8. 36 Links to reports made under ESTMA can be found on Natural Resources Canada's website at https://www.nrcan.gc.ca/mining-materials/estma/18198 . On March 19, 2014, the United States became an EITI candidate country, 37 following which the United States Extractive Industries Transparency Initiative (the “USEITI”) submitted reports for 2015 and 2016. On November 2, 2017, the United States withdrew as an EITI implementing country. 38 It has, however, maintained its status as a supporting country of the EITI. 39 37 When becoming an EITI candidate, a country must establish a multi-stakeholder group, including representatives of civil society, industry, and government, to oversee implementation of the EITI. The stakeholder group for a particular country agrees to the terms of that country's EITI plan, including the requirements for what information will be provided by the governments and by the companies operating in that country. Generally, under the EITI, companies and the host country's government submit payment information confidentially to an independent administrator selected by the country's multi-stakeholder group, which is frequently an independent auditor. The auditor reconciles the information provided to it by the government and by the companies and produces a report. While the information provided in the reports varies among countries, the reports must adhere to the EITI requirements provided in the EITI Standard. See the EITI's website at http://eiti.org . 38 See letter from Gregory Gould, Director of the Office of Natural Resources Revenue, U.S. Department of the Interior, to Fredrik Reinfeldt, Chair of the EITI (Nov. 2, 2017) (noting “the fact that the U.S. laws prevent us from meeting specific provisions of the EITI Standard”). This letter is available at https://www.doi.gov/sites/doi.gov/files/uploads/eiti_withdraw.pdf. 39 See id. The United States is currently one of 15 supporting countries of the EITI. Supporting governments are committed to promote good governance in the extractive industries across the world. Although the only formal requirement of a supporting country is to make a clear public endorsement, a country can also support the EITI through financial, technical, and political support at the international level and in implementing and other resource-rich countries. See https://eiti.org/supporters/countries . C. The 2016 Rulemaking and Congress's Actions Under the CRA 1. Key Aspects of the 2016 Rules The 2016 Rules provided for issuer-specific, public disclosure of payment information broadly in line with the standards adopted under other international transparency promotion regimes, including the EU Directives, ESTMA and the EITI. The 2016 Rules differed from the 2012 Rules in certain key aspects. These aspects included: • Defining project to mean “operational activities governed by a single contract, license, lease, concession, or similar legal agreement, which forms the basis for payment liabilities with a government;” 40 40 See Item 2.01(d)(9) of the 2016 Form SD; see also the 2016 Adopting Release, Section II.E.3. This definition also provided that “[a]greements that are both operationally and geographically interconnected may be treated by the resource extraction issuer as a single project.” The 2012 Rules did not define the term “project” but provided guidance on the meaning of the term. See the 2012 Adopting Release, Section II.D.3.c. • Adopting a targeted exemption to permit issuers to delay reporting payment information in connection with certain exploratory activities for one year; 41 41 See the 2016 Form SD, Item 2.01(b)(1); see also the 2016 Rules Adopting Release, Section II.I.3. The 2012 Rules did not provide for any exemptions, targeted or otherwise. • Revising the definition of “control” under the 2012 Rules, which had relied on the definition of control under Exchange Act Rule 12b-2, 42 by basing the definition instead on applicable accounting principles; 43 42 See the 2012 Rules Adopting Release, Section II.D.4.c. 43 See the 2016 Form SD, Item 2.01(d)(3); see also 2016 Rules Adopting Release, Section II.D.3. • Adopting an alternative reporting mechanism whereby issuers would be able to meet the requirements of the 2016 Rules by providing disclosure that complies with a foreign jurisdiction's or the USEITI's resource extraction payment disclosure requirements if they are deemed “substantially similar” by the Commission; 44 44 See the 2016 Form SD, Item 2.01(c); see also the 2016 Rules Adopting Release, Section II.J.3. • Adopting transitional relief for issuers that had recently acquired companies, where such companies had not previously been subject to the Section 13(q) rules or another “substantially similar” jurisdiction's requirements in its last full fiscal year; 45 45 See the 2016 Form SD, Item 2.01(b)(2); see also the 2016 Rules Adopting Release, Section II.G.3. • Expressly permitting the submission of requests for exemptive relief on a case-by-case basis; 46 and 46 See the 2016 Rules Adopting Release, Section II.I.3. • Including a provision requiring the Commission's staff, to the extent practicable, to periodically make available online a public compilation of the payment information required to be filed by issuers on Form SD. 47 47 See the 2016 Release, Section II.H.3. In the 2012 rulemaking, the Commission did not affirmatively adopt such a provision after noting that, by providing an issuer's Form SD filings to the public through the searchable, online EDGAR system, users of the information would be able to produce their own up-to-date compilations in real time. In the 2016 rulemaking, however, after reasserting this position, the Commission acknowledged that, as some commenters maintained, the statute could be read to require the Commission to periodically provide a public compilation separate from the individual compilations. In other respects, the 2016 Rules were the same or similar to the 2012 Rules. For example, under both sets of rules: • There was no broad, rule-based exemption for situations where a foreign law or contract term prohibited the payment disclosure; • A resource extraction issuer had to provide the payment information, including the issuer's identity, publicly on Form SD; 48 48 See the 2016 Rules Adopting Release, Section II.H.3. and the 2012 Rules Adopting Release, Section II.F.1.c. Mindful of the 2013 District Court decision, the Commission acknowledged that Section 13(q) provides the Commission with the discretion to require public disclosure of payments by resource extraction issuers or to permit confidential filings. The Commission, however, explained its continued belief that requiring public disclosure of each issuer's specific filings (including all the payment information) would best accomplish the purpose of the statute. • Form SD was to be filed with, and not furnished to, the Commission, thereby making the payment disclosure subject to liability under Section 18 of the Exchange Act; 49 49 See the 2016 Rules Adopting Release, Section II.L.3. and the 2012 Rules Adopting Release, Section II.F.3.c. • The definitions for “foreign government” and “federal government” were the same under both sets of rules; 50 50 See the 2016 Adopting Release, Section II.F.3. and the 2012 Adopting Release, Section II.E.3. • The definitions for “payment” 51 and “commercial development of oil, natural gas, or minerals” 52 were similar under both sets of rules; and 51 The 2012 Rules' definition of payments added payments for infrastructure improvements to the list of statutorily mandated payment types required to be disclosed. See the 2012 Rules Adopting Release, Section II.D.1.c. The 2016 Rules added to the 2012 Rules' list of required payment types community and social responsibility payments that are required by law or contract. The 2016 Rules also added an instruction clarifying the types of royalty payments required to be disclosed. See the 2016 Rules Adopting Release, Section II.C.3. 52 In the 2012 rulemaking, the Commission defined “commercial development of oil, natural gas, or minerals” to include certain statutorily mandated activities. It then provided guidance that the term “commercial development” applied only to activities directly related to the commercial development of oil, natural gas, or minerals, and was not intended to capture ancillary or preparatory activities. See 2012 Rules Adopting Release, Section II.C.3. In the 2016 rulemaking, the Commission adopted the same definition of “commercial development of oil, natural gas, or minerals” as in the earlier rulemaking while expanding upon and codifying the guidance regarding activities pertaining to “processing” and “export.” See the 2016 Rules Adopting Release, Section II.B.3. • Issuers had to electronically tag the payment information using the eXtensible Business Reporting Language (“XBRL”) electronic format. 53 53 See the 2016 Rules Adopting Release, Section II.K.3. and the 2012 Rules Adopting Release, Section II.F.2.c. 2. Congressional Disapproval Under the CRA On February 14, 2017, the President signed a joint resolution of Congress disapproving the 2016 Rules pursuant to the CRA. Members of the House and the Senate who supported the joint resolution expressed a number of concerns with the 2016 Rules. The principal concerns focused on the potential adverse economic effects of the rules. Specifically, members expressed the view that the 2016 Rules would impose undue compliance costs on companies, 54 undermine job growth and burden the economy, 55 and impose competitive harm to U.S. companies relative to foreign competition. 56 Members also expressed concern that the rule extended beyond the SEC's core mission. 57 54 See, e.g., 163 Cong. Rec. H.848 (February 1, 2017) (Statement of Rep. Hensarling) (“The SEC has estimated that ongoing compliance costs for his rule could reach as high as $591 million annually . . . Furthermore, this rule still goes far beyond the statute passed by Congress and mandates public specialized disclosures that cost more and more, and is more burdensome than the law requires.”). 55 See id. (Statement of Rep. Hensarling) (“That is $591 million every year that could better be used to hire thousands more Americans in an industry where the average pay is 50 percent higher than the U.S. average. Literally we could be talking about 10,000 jobs on the line for this ill-advised rule.”). 56 See id. (Statement of Rep. Hensarling) (“The economic opportunities of . . . millions of Americans . . . are not helped by top-down, politically driven regulations that give many foreign companies an advantage over American public companies. That is exactly what this Securities and Exchange Commission regulation that we are talking about today does. It forces American public companies to disclose [expensive] proprietary information that can actually be obtained by their foreign competitors, including state-owned companies in China and Russia. This is just one regulation out of thousands and thousands that are burdening our companies, our job creators, and are costing our households by one estimate, over $14,000 a year . . .”); see also 163 Cong. Rec. H.851 (February 1, 2017) (Statement of Rep. Wagner) (“This particular SEC regulation . . . regarding resource extraction disclosures will make it more expensive for our public companies that are involved with energy production to be competitive overseas with foreign state-owned companies.”). 57 See, e.g., 163 Cong. Rec. H.850 (February 1, 2017) (Statement of Rep. Huizenga) (observing that the Congressional goals underlying Section 13(q) are outside of the SEC's “core mission” of “protect[ing] investors,” “maintain[ing] fair, orderly and efficient markets,” and “facilitat[ing] capital formation”). Some members who voted in favor of the disapproval nonetheless reiterated the rule's transparency and anti-corruption objectives. For instance, a group of senators who voted for the joint resolution expressed their “strong support” for anticorruption policies and stated that they were “committed to efforts to encourage corporate transparency on these matters consistent with the international standards already adopted by European and other governments.” 58 They also indicated, however, that they voted in favor of disapproving the 2016 Rules in part due to their concern that those rules would place U.S. and other SEC-registered companies at a significant competitive disadvantage. 59 58 See Letter from Senator Bob Corker, Senator Susan Collins, Senator Marco Rubio, Senator Johnny Isakson, Senator Lindsey Graham, Senator Todd Young (Feb. 2, 2017), available at https://www.sec.gov/comments/df-title-xv/resource-extraction-issuers/resource-extraction-issuers.shtml . 59 See id. Although the joint resolution vacated the 2016 Rules, the statutory mandate under Section 13(q) of the Exchange Act remains in effect. As a result, the Commission is statutorily obligated to issue a new rule. 60 Under the CRA, however, the Commission may not reissue the same rule in “substantially the same form” or issue a new rule that is “substantially the same” as the disapproved rule. 61 The CRA does not define the phrase “substantially the same,” but the legislative history 62 urges Congress to provide direction to agencies regarding the possibility of issuing a new rule when debating the resolution of disapproval. 63 Given this legislative history, and the absence of further general guidance from the CRA or any specific legislative guidance from Congress addressing the form of a new rulemaking, we looked to the concerns raised by members of Congress during the floor debates on the joint resolution to assist us in developing a rule that is not “substantially the same” 64 as the 2016 Rules. 65 60 A number of members who supported the joint resolution noted that the Commission would be obligated to issue a new rule fulfilling the statutory mandate. See, e.g., 163 Cong. Rec. H.848, 849 (February 1, 2017) (Statement of Rep. Hensarling) (“Let's also remember that this joint resolution does not repeal section 1504 of Dodd-Frank. I wish it did, but it doesn't . . . It simply tells the SEC to go back to the drawing board, comply with the Dodd-Frank Act, and come up with a better rule . . .”); 163 Cong. Rec. S.635 (Feb. 2, 2017) (Statement of Sen. Crapo) (“What this resolution does is to cause the current SEC rule to not take effect. As it was characterized yesterday on the House floor and will be characterized further today on the Senate floor, what the SEC will need to do is to go back to the drawing board and come up with a better rule that complies with the law of the land.”). 61 See 5 U.S.C. 801(b)(2). 62 The principal sponsors of the CRA submitted identical joint explanatory statements that were “intended to provide guidance to the agencies, the courts, and other interested parties when interpreting the act's terms.” See Joint Explanatory Statement of House and Senate Sponsors (Senators Nickles, Reid, and Stevens), 142 Cong. Rec. S.3683 (April 18, 1996). 63 142 Cong. Rec. S.3686 (“The authors intend the debate on any resolution of disapproval to focus on the law that authorized the rule and make the congressional intent clear regarding the agency's options or lack thereof after enactment of a joint resolution of disapproval. It will be the agency's responsibility in the first instance when promulgating the rule to determine the range of discretion afforded under the original law and whether the law authorizes the agency to issue a substantially different rule. Then, the agency must give effect to the resolution of disapproval.”). 64 See 5 U.S.C. 801(b)(2). 65 See supra n. 54-57. In this regard, we note that many of the concerns raised by members of Congress were raised by commenters in the previous rulemakings. See, e.g., Letters from the American Petroleum Institute (“API”) (Feb. 16, 2016); ExxonMobil Corporation (“ExxonMobil”) (Feb. 16, 2016); and Chevron Corporation (“Chevron”) (Feb. 16, 2016). Request for Comment We welcome feedback and encourage interested parties to submit comments on any or all aspects of the proposed amendments. When commenting, it would be most helpful if you include the reasoning behind your position or recommendation. 1. Are there any data since the 2016 Rules concerning actual costs of compliance with mandatory disclosure regimes that relate to or otherwise address the Congressional concerns about the potential adverse economic effects of the rules, and specifically, that the 2016 Rules would impose undue compliance costs on companies? Should we consider, and if so how, the compliance cost data in the UK Government's Department for Business, Energy and Industrial Strategy post-implementation review of the UK regulations, 66 in determining how to address the stated Congressional concerns? 66 See Department for Business, Energy and Industrial Strategy (BEIS), Reports on Payments to Governments Regulations: Final Report, BEIS Research Paper, Jan. 2018, available at http://www.legislation.gov.uk/uksi/2014/3209/pdfs/uksiod_20143209_en_001.pdf . See infra Section III.D.11. for a related discussion of the UK report. 2. Have there been any developments or changes in industry practices since the 2016 Rules related to how companies track and record payment information or how they capture the cost of compliance with mandatory disclosure regimes that could impact or otherwise address the stated Congressional concerns? 3. Proposed Rules in Response to the CRA Disapproval Similar to the prior rules, the proposed rules, which are described in more detail in Part II below, would require resource extraction issuers to submit on an annual basis a Form SD that includes information about payments related to the commercial development of oil, natural gas, or minerals that are made to governments. Given the requirements of Section 13(q), certain elements of the proposed rules are also in the 2016 Rules. 67 Nevertheless, we believe that the proposed rules, considered as a whole, are not in substantially the same form as the 2016 Rules and therefore in compliance with the CRA's restriction on subsequent rulemaking. 68 67 For example, we are proposing the same targeted exemption for exploratory activities, the same transitional relief for recently acquired companies, and a similar alternative reporting mechanism, all of which were adopted in 2016 primarily to limit compliance costs. See supra Section I.C.1. We also are proposing the same definitions as adopted in 2016 for “resource extraction issuer,” “commercial development of oil, natural gas, or minerals,” “payment,” and “foreign government.” As further discussed below, most commenters who addressed those definitions in the 2016 rulemaking generally supported them. 68 The CRA instructs that the “new rule” cannot be “substantially the same” or in “substantially the same form” as the disapproved rule. See 5 U.S.C. 801(b)(1). We believe that this language clearly reflects Congress' intent that, in issuing a new rule, an agency must do more than substantially revise the rationales supporting the prior rule or the economic analysis underlying the prior rule. Rather, the CRA instructs that the “new rule” itself must be substantially different. As such, we do not believe that readopting the 2016 Rules with modifications only to the rationales or economic analysis in the release would satisfy the substantially different requirement mandated by the plain language of the CRA. Instead, we concur with the views of two scholars that the CRA requires changes to the rule itself. See Adam M. Finkel and Jason W. Sullivan, 63 Administrative Law Review 707, 757-58 (2011) (asserting that the view that “anything goes so long as the agency merely asserts that external conditions have changed . . . would contravene all the plain language and explanatory material in the CRA. Even if the agency believes it now has better explanations for an identical reissued rule, the appearance of asking the same question until you get a different answer is offensive enough to bedrock good government principles that the regulation should be required to have different costs and benefits after a veto, not just new rhetoric about them.”). In this regard, the proposed new rules include several significant changes to the core provisions of the 2016 Rules. Specifically, the proposed rules would: (1) Revise the definition of the term “project” to require disclosure at the national and major subnational political jurisdiction, as opposed to the contract, level; 69 (2) revise the definition of “not de minimis” to include both a project threshold and an individual payment threshold; 70 (3) add two new conditional exemptions for situations in which a foreign law or a pre-existing contract prohibits the required disclosure; 71 (4) add an exemption for smaller reporting companies and emerging growth companies; 72 (5) revise the definition of “control” to exclude entities or operations in which an issuer has a proportionate interest; 73 (6) limit the liability for the required disclosure by deeming the payment information to be furnished to, but not filed with, the Commission; 74 (7) add an instruction in Form SD that would permit an issuer to aggregate payments by payment type made at a level below the major subnational government level; 75 (8) add relief for issuers that have recently completed their U.S. initial public offerings; 76 and (9) extend the deadline for furnishing the payment disclosures. 77 These changes, which directly impact the amount, granularity, timing, scope of, and liability for, the required disclosures, form the basis for our belief that, when considered as a whole, the proposed rules are not in substantially the same form as the 2016 Rules. 69 See infra Section II.F. 70 See infra Section II.C.9. 71 See infra Sections II.J.1. and II.J.2. 72 See infra Sections II.J.3. 73 See infra Section II.E. 74 See infra Section II.M. 75 See infra Section II.G. 76 See infra Section II.J.5. 77 See infra Section II.H. The following chart summarizes the primary changes in the proposed rules compared to the 2016 Rules: Issue 2016 Rules (disapproved) Proposed rules Definition of “project” • Defined as operational activities governed by a single contract, license, lease, concession, or similar legal agreement, which forms the basis for payment liabilities with a government. • Defined using three factors: (1) Type of resource; (2) type of operation; and (3) major subnational jurisdiction. Aggregation of payments • No aggregation of payments beyond contract level, except that payments related to operational activities governed by multiple legal agreements could be aggregated together as long as the multiple agreements were operationally and geographically related. • Aggregation of payments permitted at major subnational jurisdiction level, which must be identified; • Aggregation of payments permitted at levels below major subnational level, which may be described generically ( e.g., as county or municipality). Definition of “not de minimis” payment • Defined as a payment that equals or exceeds $100,000. • Defined as any payment that equals or exceeds $150,000 made in connection with a project that equals or exceeds $750,000 in total payments. Exemptions from compliance based on conflicts with foreign laws or contract terms • No exemptions for conflicts with foreign laws or contract terms. • Case-by-case exemptive process established. • Conditional exemptions for foreign law conflicts and pre-existing (pre-adoption) contract terms that prohibit disclosure. Exemption for smaller reporting companies or emerging growth companies • No exemption for smaller reporting companies or emerging growth companies. • Exemption for smaller reporting companies and emerging growth companies. Definition of “control” • Based on established financial reporting principles: Issuer has control over an entity when it is required under GAAP or IFRS to consolidate or proportionately consolidate the financial results of that entity. • Similar to approach under 2016 Rules, except that an issuer is not required to disclose payments made by entities that it only proportionately consolidates. Filed vs. Furnished—Application of Exchange Act Section 18 liability • Reports required to be filed; • Potential Section 18 liability. • Reports are furnished; • No Section 18 liability. Relief for Initial Public Offerings (IPOs) • No relief for IPOs. • Transitional relief for IPOs; • Issuer would not have to comply with the Section 13(q) rules until the first fiscal year following the fiscal year in which it completed its initial public offering. Deadline for Furnishing Payment Disclosures • For all issuers, no later than 150 days after the end of the issuer's most recent fiscal year. • For issuers with fiscal years ending on or before June 30, no later than March 31 in the following calendar year; • For issuers with fiscal years ending after June 30, no later than March 31 in the second calendar year following their most recent fiscal year. In proposing these provisions and other aspects of this rulemaking, we have striven to achieve an appropriate balance between implementing the statute as required by Congress and addressing the concerns expressed by commenters and members of Congress. 78 Specifically, we expect that the proposal would meaningfully reduce the compliance burden for issuers compared to the compliance burden estimated for the 2016 Rules, for example, by permitting greater aggregation of payments at the major subnational level and at lower government levels. We also believe that, for the same reason, the proposal would address the concerns about potential competitive harm that the 2016 Rules would have caused as a result of the public disclosure of contract level payment information. 78 As noted above, the estimated cost of compliance of the 2016 Rules and the potential for competitive harm were specifically noted by the members of Congress who voted to disapprove the rules. See, e.g., 163 Cong. Rec. H.848 (daily ed. Feb. 1, 2017) (statement of Rep. Hensarling); 163 Cong. Rec. at H.852 (statement of Rep. Barr). On the other hand, we have not provided for the confidential submission of payment information, as suggested by some commenters. 79 In addition, we have not provided for the release of information only through an anonymized, aggregated compilation produced by the Commission, as suggested by some commenters. 80 As explained below, we believe that public disclosure of company-specific, project-level payment information provides an appropriate balance between the stated concerns with the 2016 Rules and the mandate of Section 13(q) to increase transparency of payments to governments in resource-rich nations. 81 However, we are requesting comment on an alternative approach that would allow for confidential filing and would release information only through an anonymized, aggregated compilation. 82 79 See, e.g., Letters from API (Nov. 7, 2013) (submitted prior to the 2016 Proposing Release) and (Feb. 16, 2016); Letter from Chevron (Feb. 16, 2016); and Letter from Royal Dutch Shell plc (“RDS”) (Feb. 5, 2016). 80 See id. 81 See infra Sections II.F. and II.I. 82 See infra Section II.I. II. Proposed Rules Under Section 13(q) A. Definition of “Resource Extraction Issuer” Section 13(q) defines a resource extraction issuer in part as an issuer that is “required to file an annual report with the Commission.” We believe this language could reasonably be read to include or to exclude issuers that file annual reports on forms other than Forms 10-K, 20-F, or 40-F. We are therefore using our discretion and proposing to cover only issuers filing annual reports on Forms 10-K, 20-F, or 40-F. Specifically, the proposed rules would define the term “resource extraction issuer” to mean an issuer that is required to file with the Commission an annual report on one of those forms pursuant to Section 13 or 15(d) of the Exchange Act and that engages in the commercial development of oil, natural gas, or minerals. 83 As with the 2016 Rules, we believe that covering issuers that provide disclosure outside of the Exchange Act reporting framework would do little to further the transparency objectives of Section 13(q) but would add costs and burdens to the existing disclosure regime governing those categories of issuers. The proposed definition would therefore exclude issuers subject to Tier 2 reporting obligations under Regulation A and issuers filing annual reports pursuant to Regulation Crowdfunding. 84 In addition, investment companies registered under the Investment Company Act of 1940 (“Investment Company Act”) would not be subject to the proposed rules. 85 83 See proposed Rule 13q-1(a) and proposed Item 2.01(d)(11) of Form SD. We interpret “engages” as used in Section 13(q) and proposed Rule 13q-1 to include indirectly engaging in the specified commercial development activities through an entity under a company's control. See infra Section II.E. for our discussion of “control.” 84 In prior releases, the Commission noted that, in the staff's experience, resource extraction issuers rarely use Regulation A. This continues to be the case. Between June 2015 through September 2017, only one of the Regulation A issuers with a qualified offering statement appears to have been a resource extraction issuer at the time of filing based on a review of assigned Standard Industrial Classification (SIC) codes. Similarly, between May 2016 and December 2016, only one of the Regulation Crowdfunding issuers appears to have been a resource extraction issuer. 85 It seems unlikely that an entity that fits within the definition of “investment company” would be one that is “engag[ing] in the commercial development of oil, natural gas, or minerals.” See Section 3(a)(1) of the Investment Company Act (15 U.S.C. 80a-3(a)(1)). Almost all of the commenters on the 2016 Rules Proposing Release supported a definition similar to the one we are proposing today 86 Consistent with the 2016 Rules, we are not proposing exemptions to our definition of “resource extraction issuer” based on foreign private issuer status 87 or the extent of business operations constituting commercial development of oil, natural gas, or minerals. 86 See 2016 Rules Adopting Release, Section II.A.2. 87 See the definition of “foreign private issuer” in Securities Act Rule 405 [17 CFR 230.405] and Exchange Act Rule 3b-4 [17 CFR 240.3b-4]. We are, however, proposing to exclude from the proposed rules foreign private issuers that are exempt from Exchange Act registration and reporting obligations pursuant to Exchange Act Rule 12g3-2(b) (17 CFR 240.12g3-2(b). As discussed in prior releases, we believe that expanding the statutory definition of “resource extraction issuer” to include foreign private issuers that are relying on Rule 12g3-2(b) would discourage reliance on the exemption and would be inconsistent with the effect and purpose of that rule. See the 2016 Rules Adopting Release, Section II.A.3; and the 2016 Rules Proposing Release, Section II.A. We are, however, proposing to exempt smaller reporting companies 88 and emerging growth companies 89 from the scope of Rule 13q-1. As explained below, 90 we believe that this proposed change from the 2016 Rules would reduce the overall cost of the proposed rules 91 and address the related Congressional concerns. 92 88 See the definition of smaller reporting company in Securities Act Rule 405 (17 CFR 230.405) and Exchange Act Rule 12b-2 (17 CFR 240.12b-2). 89 See the definition of emerging growth company in Securities Act Rule 405 and Exchange Act Rule 12b-2; see also Securities Act Section 2(a)(19) (15 U.S.C. 77b(a)(19)) and Exchange Act Section 3(a)(80) (15 U.S.C. 78c(a)(80)). 90 See infra Section II.J.3. 91 We solicit comment on our proposed exemption for smaller reporting companies and emerging growth companies in Section II.J.3. below. 92 See supra n. 54 and accompanying text. Request for Comment 3. Should we define “resource extraction issuer” to mean an issuer that is required to file with the Commission an annual report on Form 10-K, Form 20-F, or Form 40-F pursuant to Section 13 or 15(d) of the Exchange Act and that engages in the commercial development of oil, natural gas, or minerals, as proposed? Should we alter our approach to the definition of “resource extraction issuer” based on any developments since the adoption of the 2016 Rules or in light of our other proposals in this release? 4. Should we exclude other categories of issuers, such as foreign private issuers, from the definition of “resource extraction issuer”? B. Definition of “Commercial Development of Oil, Natural Gas, or Minerals” Consistent with the statutory definition, the proposed rules would define “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. 93 Although we have discretionary authority to include other significant activities relating to oil, natural gas, or minerals, 94 we are not proposing to expand the list of covered activities beyond the explicit terms of Section 13(q). We adopted the same approach when defining “commercial development of oil, natural gas, or minerals” in the 2016 rulemaking, and most commenters that addressed this aspect of the prior rules supported this approach. 95 As was the case with the 2016 Rules, we have not sought to impose disclosure obligations that extend beyond Congress' required disclosures in Section 13(q) and the disclosure standards developed in connection with international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals. This approach should limit the compliance costs of the Section 13(q) rules. 93 See 15 U.S.C. 78m(q)(1)(A). 94 See id. 95 See the 2016 Rules Adopting Release, Section II.B.2.a. The proposed definition of “commercial development” would capture only those 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. Accordingly, a company that is only providing products or services that support the exploration, extraction, processing, or export of such resources would not be a “resource extraction issuer” under the proposed rules. 96 For example, a company that manufactures drill bits or provides hardware to help companies explore and extract would not be considered a resource extraction issuer. Similarly, a company engaged by an operator to provide hydraulic fracturing or drilling services, to enable the operator to extract resources, would not be a resource extraction issuer. 97 We believe this approach is consistent with Section 13(q) and the approach adopted in the 2016 rulemaking, which most commenters who addressed the issue supported. 98 96 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 Rules Adopting Release at n.146 and Section II.D. for a related discussion of payments for security support. 97 A resource extraction issuer would be required, under the proposed rules, to disclose payments when such a service provider makes a payment to a government on its behalf that meets the definition of “payment.” See proposed Instruction 7 to Item 2.01 of Form SD. We discuss the definition of “payment” in Section II.C below. 98 See the 2016 Rules Adopting Release, Section II.B.2.a. In the past, commenters have requested clarification of the activities covered by the definition of “commercial development.” 99 We discuss our proposals to define or provide guidance on several terms contained within the definition in the subsections that follow. 99 See 2016 Rules Adopting Release, Section II.B.2; 2012 Rules Adopting Release, Section II.C.2. Request for Comment 5. Should we define “commercial development of oil, natural gas, or minerals” using the list of activities described in the statute, as proposed? Should we alter our approach based on any developments since the adoption of the 2016 Rules or in light of our other proposals in this release? 1. “Extraction” and “Processing” As proposed, and consistent with the definitions adopted in the 2016 rulemaking, 100 “extraction” would be defined as the production of oil and natural gas as well as the extraction of minerals. 101 “Processing” would include, but would not be limited to, midstream activities such as removing liquid hydrocarbons from gas, removing 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. “Processing” would also include the crushing or preparing of raw ore prior to the smelting or refining phase. 102 “Processing” would not include downstream activities, such as refining or smelting. As noted above, 103 the focus of 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. 104 Accordingly, we do not believe that, for purposes of the proposed rules, the term “processing” should cover downstream activities. We also note that including refining or smelting within the rules under Section 13(q) would go beyond what is contemplated by the statute. 100 Several commenters specifically supported the definitions of “extraction” and “processing” proposed in the 2016 rulemaking while other commenters sought additional guidance regarding the types of activities covered by the term “processing.” See 2016 Rules Adopting Release, Section II.B.3. 101 See proposed Item 2.01(d)(5) of Form SD. 102 See proposed Instruction 8 to Item 2.01 of Form SD. Although substantively the same as the instruction found in the 2016 Rules, we are proposing revisions for additional clarity. 103 See supra Section I.A. 104 We also note that, in other contexts, Congress has treated midstream activities like “processing” and downstream activities like “refining” as separate activities, which further supports our view that Congress did not intend to include “refining” and “smelting” as “processing” activities. 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 Public Law 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 the 2012 Rules Adopting Release, n.108. Request for Comment 6. Should we define “extraction” as the production of oil and natural gas as well as the extraction of minerals, as proposed? 7. Are the types of activities covered by the term “processing” appropriate? 8. Should we alter our approach to the definition of “extraction” or the instruction on “processing” based on any developments since the adoption of the 2016 Rules or in light of our other proposals in this release? 2. “Export” The proposed definition of “commercial development of oil, natural gas, or minerals” would not cover transportation made for a purpose other than export. Instead, “export” would be defined 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. 105 This definition would reflect 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. 106 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. 105 See proposed Item 2.01(d)(4) of Form SD. 106 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. Accordingly, the proposed definition of “export” would 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. 107 The definition would cover, however, the purchase of such government-owned resources by a company otherwise engaged in resource extraction due to the stronger nexus between the movement of the resource across an international border and the upstream development activities. This nexus would be particularly strong in instances where the company is repurchasing government production entitlements that were originally extracted by that issuer. 108 107 See proposed Item 2.01(d)(4) of Form SD. 108 See infra Section II.C.6 (discussing when and how payments must be reported in instances where an issuer is repurchasing government production entitlements that were originally extracted by that issuer). The proposed definition of export is consistent with the approach regarding “export” adopted by the Commission in the 2016 rulemaking. The Commission articulated this approach in specific response to one commenter who sought additional guidance on the scope of the term “export” under the Section 13(q) rules. 109 109 See Letter from Pietro Poretti (Feb. 15, 2016). Except for this commenter, the Commission's proposed definition of “export” was largely unaddressed by commenters in the 2016 rulemaking. Request for Comment 9. Should we adopt the definition of “export,” as proposed? If we should provide a different definition, what should it be? Should we alter our approach based on any developments since the adoption of the 2016 Rules or in light of our other proposals in this release? 3. “Minerals” The proposed rules would include an instruction on the meaning of the term “minerals” but would not provide a defined term. We believe that the term is commonly understood and includes, at a minimum, any material for which an issuer with mining operations would provide disclosure under the Commission's existing disclosure requirements for mining properties. 110 In support of this approach, which is consistent with the Commission's approach in the 2016 rulemaking, we note that no industry commenter suggested that we define the term in connection with the 2016 Rules. 111 We also believe that a flexible approach to this term would preserve consistency between the term's use under Rule 13q-1 and its use in our other disclosure requirements and policies. 112 110 The Commission recently revised its disclosure requirements for mining properties to provide investors with a more comprehensive understanding of a registrant's mining properties and to align those disclosure requirements and policies more closely with current industry and global regulatory practices and standards. See Release No. 33-10570 (October 31, 2018) [83 FR 66344 (December 26, 2018)]. The new mining property disclosure rules, which are codified in subpart 1300 of Regulation S-K (17 CFR 229.1300), will replace the mining property disclosure guidance in Industry Guide 7 [17 CFR 229.801(g) and 802(g)] and requirements in Item 102 of Regulation S-K (17 CFR 229.102). Registrants engaged in mining operations must comply with the new rules for the first fiscal year beginning on or after January 1, 2021. Industry Guide 7 will remain effective until all registrants are required to comply with the final rules, at which time Industry Guide 7 will be rescinded. See Release No. 33-10570, Section I. 111 See 2016 Rules Adopting Release, n.149 and accompanying text. 112 For example, new subpart 1300 of Regulation S-K defines “mineral resource” to mean a concentration or occurrence of material of economic interest in or on the Earth's crust in such form, grade or quality, and quantity that there are reasonable prospects for economic extraction. “Material of economic interest” is then defined to include “mineralization, including dumps and tailings, mineral brines, and other resources extracted on or within the earth's crust” while excluding oil and gas resources resulting from oil and gas producing activities, gases ( e.g., helium and carbon dioxide), geothermal fields, and water. See 17 CFR 229.1300. Industry Guide 7 similarly does not explicitly define the term “minerals,” but does provide a definition of, and guidance regarding the disclosure of, “reserves,” which includes references to “minerals” and “mineralization.” The proposed instruction to Form SD would refer issuers to the use of the term “minerals” in our other disclosure rules. 113 As such, the guidance would encompass any changes to that term that may be reflected in our disclosure requirements for mining registrants. 113 See proposed Instruction 13 to Item 2.01 of Form SD. 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. Request for Comment 10. Should we adopt the instruction on the meaning of the term “mineral,” as proposed? Is the proposed instruction sufficiently clear for issuers to identify when they are engaged in the commercial development of a mineral? 11. Have there been developments since the 2016 Rules that should lead us to provide a defined term for “mineral” or different guidance? If so, what should be the definition or guidance? C. Definition of “Payment” Section 13(q) defines “payment” to mean a payment that: • Is made to further the commercial development of oil, natural gas, or minerals; • Is not de minimis; and • Includes taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits, that the Commission, consistent with the EITI's guidelines (to the extent practicable), determines are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals. 114 114 15 U.S.C. 78m(q)(1)(C). As with the 2016 Rules, the proposed rules would define payments to include the specific types of payments identified in the statute, as well as community and social responsibility (“CSR”) payments that are required by law or contract, payments of certain dividends, and payments for infrastructure. The proposed rules would also provide additional guidance on the statutory payment categories of royalties, fees, and bonuses. Finally, the proposed rules would address in-kind payments. 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.” 115 According to Section 13(q), these “other material benefits” must be consistent with the EITI's guidelines “to the extent practicable.” 116 Some commenters on the 2012 Rules Proposing Release suggested that we include a broad, non-exhaustive list of payment types or category of “other material benefits.” 117 Commenters on the 2016 Rules Proposing Release, however, did not make a similar suggestion. 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. Accordingly, the other material benefits specified in the proposed rules would be limited to CSR payments required by law or contract, dividends, and infrastructure payments. As was the case with the 2016 Rules, and as discussed in more detail below, we have determined that these payment types represent material benefits that are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, and minerals and that otherwise meet the definition of payment. 115 15 U.S.C. 78m(q)(1)(C)(ii). 116 Id. 117 See 2012 Rules Adopting Release, n.175 and accompanying text. 1. Taxes Consistent with Section 13(q), the proposed rules would require a resource extraction issuer to disclose tax payments. The proposed rules also include an instruction to clarify that a resource extraction issuer would be required to disclose payments for taxes levied on corporate profits, corporate income, and production, but would not be required to disclose payments for taxes levied on consumption, such as value added taxes, personal income taxes, or sales taxes. 118 In response to earlier concerns expressed by commenters about the difficulty of allocating payments that are made for obligations levied at the entity level, such as corporate taxes, to the project level, 119 the proposed rules would provide that issuers may disclose those payments at the entity level rather than the project level. 120 118 See proposed Instruction 9 to Item 2.01 of Form SD. 119 See 2012 Rules Adopting Release, n.155 and accompanying text. 120 See proposed Instruction 4 to Item 2.01 of Form SD. Request for Comment 12. Is the proposed approach to disclosure of tax payments appropriate? Should we alter our approach based on any developments since the adoption of the 2016 Rules or in light of our other proposals in this release? Would allowing disclosure of tax payments at the entity level improperly inflate reported payments? 13. Should we provide 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 may be earned from other business activities in the same jurisdiction as well? If so, what guidance should we provide? 2. Royalties, Fees, and Bonuses The definition of “payment” in Section 13(q) includes royalties, fees, and bonuses. The statute provides “license fees” as an example of the types of fees covered by that term but does not provide examples of royalties and bonuses. 121 As under the 2016 Rules, the proposed rules would provide further clarification of these terms by including an instruction setting forth a non-exclusive list of fees (rental fees, entry fees, and concession fees), bonuses (signature, discovery, and production bonuses), and royalties (unit-based, value-based, and profit-based royalties) that would be considered payments under the proposed rules. The types of fees and bonuses we are proposing to include are specifically mentioned in the EITI's guidance as payments that should be disclosed by EITI participants, 122 which supports our view that they are part of the commonly recognized revenue stream. The types of royalties we are proposing to include are not mentioned in the EITI's guidance but, based on the experience of the Commission staff's mining engineers, we believe they are also part of the commonly recognized revenue stream and that including them would provide additional clarity for issuers. 123 These examples would be provided as guidance, and resource extraction issuers could be required to disclose other types of fees, bonuses, and royalties depending on the facts and circumstances. 121 15 U.S.C. 78m(q)(1)(C)(ii). 122 See EITI Standard, at 23. 123 See proposed Instruction 10 to Item 2.01 of Form SD. For a discussion of these types of royalties, see 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. Request for Comment 14. Should we adopt an instruction providing examples of fees, bonuses, and royalties that would be considered “payments,” as proposed? Is our interpretation of royalties overly broad? Should we alter our approach based on any developments since the adoption of the 2016 Rules or in light of our other proposals in this release? 3. Dividend Payments As under the 2016 Rules, the proposed rules would include dividends in the list of payment types required to be disclosed. None of the commenters on the 2016 Rules Proposing Release objected to the inclusion of dividend payments. The proposed rules would clarify in an instruction that a resource extraction issuer generally would not need to disclose dividends paid to a government as a common or ordinary shareholder of the issuer as long as the dividend is paid to the government under the same terms as other shareholders. 124 The issuer would, however, be required to disclose any dividends paid to a government in lieu of production entitlements or royalties. Under this approach, ordinary dividend payments would not be part of the commonly recognized revenue stream because they are not made to further the commercial development of oil, natural gas, or minerals. This approach is consistent with the approach taken towards dividend payments in both the 2012 Rules and 2016 Rules. Most of the commenters who discussed the definition of payments in the earlier rulemakings either supported or did not object to this approach towards dividends. 125 124 See proposed Instruction 11 to Item 2.01 of Form SD. 125 See 2012 Adopting Release, Section II.D.1.b. and 2016 Adopting Release, Section II.C.2.a. Request for Comment 15. Should we require disclosure of dividend payments, as proposed? Should we alter our approach based on any developments since the adoption of the 2016 Rules or in light of our other proposals in this release? 4. Infrastructure Payments The proposed rules would require the disclosure of payments for infrastructure, such as building a road or railway to further the development of oil, natural gas, or minerals. 126 We believe such payments are “other material benefits” that are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals. 127 Like dividend payments, none of the commenters on the 2016 Rules Proposing Release objected to the inclusion of infrastructure payments. 126 We note that payments for infrastructure often are in-kind payments rather than direct monetary payments. For additional discussion of our proposed approach to in-kind payments, see infra Section II.C.6. 127 See Letters from AngloGold Ashanti (Jan. 31, 2011) (“AngloGold”); Barrick Gold Corporation (Feb. 28, 2011) (“Barrick Gold”); EarthRights International (Jan. 26, 2011) (“ERI 1”); Earthworks (Mar. 2, 2011) (“Earthworks”); Global Witness (Feb. 25, 2011); ONE (Mar. 2, 2011) (“ONE”); and Publish What You Pay U.S. (Feb. 25, 2011). Disclosure of payments for infrastructure improvements is also required under the EITI. See, e.g., EITI Standard at 24. Request for Comment 16. Should we require the disclosure of infrastructure payments, as proposed? Should we alter our approach based on any developments since the adoption of the 2016 Rules or in light of our other proposals in this release? 5. Community and Social Responsibility Payments The proposed rules would require disclosure of CSR payments that are required by law or contract. 128 For the reasons discussed below, we believe that such CSR payments are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals. 128 CSR payments could include, for example, funds to build or operate a training facility for oil and gas workers, funds to build housing, payments for tuition or other educational purposes, and in general payments to support the social or economic well-being of communities within the country where the expenditures are made. Most commenters on the 2016 Rules Proposing Release that addressed the issue supported the inclusion of CSR payments. 129 We find the evidence cited by those commenters to be persuasive. For example, one commenter noted prevalent discussion of CSR payments in industry conferences, studies, guidance, and compliance manuals. 130 This view was supported by a broad range of commenters and 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. 131 129 See 2016 Rules Adopting Release, Section II.C.2.a. The one commenter that opposed including CSR payments stated that those payments were not part of the commonly recognized revenue stream due to their philanthropic or voluntary nature. See Letter from Encana Corporation (Jan. 25, 2016) (“Encana”). 130 See Letter from Prof. Harry G. Broadman and Bruce H. Searby (Jan. 25, 2016). 131 See Letter from ExxonMobil (Feb. 16, 2016). In addition to the views of commenters, there is other evidence supporting the significant role that CSR payments have in the extractive industries. For example, several issuers already report their required or voluntary CSR payments. 132 Furthermore, disclosure of CSR payments that are required by law or contract has been required under the EITI since 2013. 133 Accordingly, we find that the evidence on balance supports the conclusion that such payments are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals. 132 See, e.g., Statoil ASA, 2017 Sustainability Report, p. 36 (disclosing that in 2017 Statoil made $4.6 million in social investments); Newmont Goldcorp, Beyond the Mine: 2017 Sustainability Report, p. 87 (reporting a total of over $13.9 million in community investments); and BHP Billiton Ltd., 2018 Sustainability Report, pp. 7 and 37 (reporting that BHP's voluntary community investment totaled $77.1 million in 2018). 133 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. See EITI Standard, at 28. Request for Comment 17. Should we require disclosure of CSR payments, as proposed? Should we alter our approach based on any developments since the adoption of the 2016 Rules or in light of our other proposals in this release? For example, is there evidence to suggest that CSR payments are not part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals? 18. If we exclude CSR payments from the list of covered payment types, should we provide additional guidance concerning how an issuer would distinguish CSR payments from infrastructure payments? 6. In-Kind Payments The proposed rules would require disclosure of payments that fall within the specified payment types that are made in-kind rather than through a monetary payment to the host country government. 134 Examples include production entitlement payments and infrastructure payments. None of the commenters on the 2016 Rules Proposing Release objected to the inclusion of in-kind payments in the 2016 Rules. 134 See proposed Instruction 12 to Item 2.01 of Form SD. Section 13(q) specifies that the rules require the disclosure of the type and total amount of payments made for each project and to each government. Accordingly, issuers would need to determine the monetary value of in-kind payments. 135 Similar to the 2016 Rules, the proposed rules specify that issuers must report in-kind payments at historical cost, or if historical costs are not reasonably determinable, fair market value, and provide a brief description of how the monetary value was calculated. 136 We continue to believe that the required disclosure would be more consistent and comparable if issuers are required to report in-kind payments at cost and only permitted to report using fair market value if historical costs are not reasonably available or determinable. 137 135 In addition, in light of the requirement in Section 13(q) to tag the information to identify the currency in which the payments were made, the proposed rules would instruct issuers providing a monetary value for in-kind payments to tag the information as “in-kind” for purposes of the currency tag. See proposed Instruction 12 to Item 2.01 of Form SD. 136 See id. 137 This approach is consistent with the recommendation of some commenters in the 2012 rulemaking. See 2012 Adopting Release, Section II.D.1.c. As under the 2016 Rules, the proposed rules would also include an instruction clarifying 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. 138 An issuer's purchase of production entitlements affects the ultimate cost of such entitlements. Accordingly, if the issuer would be required to 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 would be required to use the purchase price (rather than using the valuation methods described above) when reporting the in-kind value of the production entitlement. 138 See proposed Instruction 12 to Item 2.01 of Form SD. 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 would be required to 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 would be required. We also considered whether to require issuers to report the volume of in-kind payments. Commenters on the 2016 Rules Proposing Release were divided on whether to require the reporting of volume. 139 We generally agree with the commenter that stated such information was unnecessary. 140 In this regard, we note that issuers would be required to provide a brief description of how the monetary value was calculated, which will provide additional context for assessing the reasonableness of the disclosure. Based on these considerations, we are not proposing disclosure related to volume. 139 See 2016 Rules Adopting Release, Section II.C.2.a. 140 See Letter from ExxonMobil (Mar. 8, 2016). Request for Comment 19. Should we require an issuer to report in-kind payments at cost, or if cost is not reasonably available or determinable, at fair market value, and provide a brief description of how the monetary value was calculated, as proposed? Should we alter our approach based on any developments since the adoption of the 2016 Rules, in light of our other proposals in this release or for any other reason? Specifically, should we require an issuer to report in-kind payments at fair market value, or at cost only if fair market value is not reasonably available or determinable? Should we instead permit resource extraction issuers to choose whether to report in-kind payments at cost or fair market value? 20. Should we include an instruction regarding how to calculate the in-kind value of a production entitlement, as proposed? Is the proposed instruction sufficiently clear for resource extraction issuers to determine how to calculate the in-kind value? 7. Other Payment Types Some commenters on the 2016 Rules Proposing Release suggested that we add other payment types such as commodity trading related payments, 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. 141 We are not proposing to require disclosure for such payment types because we do not believe that they represent material benefits that are part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals. 141 See 2016 Rules Adopting Release, Section II.C.2.a. With respect to commodity trading-related payments, we believe that the proposed definition of “export” and the categories of payments in the proposed 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 or similar companies to purchase natural resources. 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 warrant being covered by the proposed rules, particularly when the proposed rules already would require disclosure of in-kind payments of production entitlements. As discussed above, the proposed rules would, however, address how such production entitlement payments must be valued when initially made by an issuer in-kind but the associated resources are subsequently purchased by the same issuer from the recipient government. We are also not specifically proposing requirements to disclose 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 would be covered by the proposed anti-evasion provision discussed below. 142 142 See infra Section II.D. See also 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). In addition, the proposed rules would not require issuers to disclose payments for fines and penalties. We do not believe that such payments relate sufficiently to the commercial development of natural resources to warrant inclusion. Request for Comment 21. In light of developments since the 2016 Rules or other aspects of the proposed rules, should we add other payment types or eliminate certain payment types from the proposed list of covered payment types? If so, please explain which payment types should or should not be considered part of the commonly recognized revenue stream for the commercial development of oil, natural gas, or minerals. If you recommend adding other payment types, please also explain how they are consistent with the EITI's guidelines and how their inclusion would support the commitment of the Federal Government to international transparency promotion efforts relating to the commercial development of oil, natural gas or minerals. 8. Accounting Considerations Under the proposed rules, Form SD would expressly state that the payment disclosure must be made on a cash basis instead of an accrual basis and need not be audited. 143 We believe that requiring reporting to be made on a cash basis is the best approach because: (1) These payment disclosures are largely cash-based, so reporting them on a cash basis would limit the associated compliance burden, and (2) requiring a consistent approach to reporting would improve comparability and therefore result in greater transparency. This is consistent with the approach that the Commission proposed and adopted in the 2016 rulemaking. 144 143 See proposed Item 2.01(a)(2) of Form SD. 144 See the 2016 Adopting Release, Section II.C.3. With respect to whether to require the payment information to be audited, we note that the EITI approach is different from Section 13(q). Under the EITI, companies and the host country's government generally each submit payment information confidentially to an independent administrator selected by the country's multi-stakeholder group, frequently an independent auditor, who reconciles the information provided by the companies and the government and then produces a report. 145 In contrast, Section 13(q) does not contemplate that an administrator would audit and reconcile the information or produce a report as a result of the audit and reconciliation. Moreover, while Section 13(q) refers to “payments,” it does not require the information to be included in the financial statements. In addition, we recognize the concerns raised by some previous commenters that an auditing requirement for the payment information would significantly increase implementation and ongoing reporting costs. 146 145 See EITI Standard, at 15, 25-26. 146 See, e.g., Letters from Anadarko Petroleum Corporation (Mar. 2, 2011), AngloGold, API (Jan. 28, 2011), British Petroleum p.l.c. (Feb. 11, 2011), Chevron Corporation (Jan. 28, 2011), Ernst & Young (Jan. 31, 2011), New York State Bar Association, Securities Regulation Committee (Mar. 1, 2011), Petroleo Brasileiro S.A. (Feb. 21, 2011), and PricewaterhouseCoopers LLP (Mar. 2, 2011). Request for Comment 22. Should we require issuers to disclose payment information on a cash basis rather than an accrual basis, as proposed? Should we alter our approach based on any developments since the adoption of the 2016 Rules or in light of our other proposals in this release? 9. The “Not De Minimis” Threshold The 2016 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. 147 In light of the previously expressed concerns that the threshold was unreasonably low and costly to calculate 148 and the likely impact of the revised definition of project that we are proposing, 149 we no longer believe that the $100,000 threshold is the best method for determining whether a payment is “not de minimis” under Section 13(q). 150 Rather, we believe that an appropriate threshold for determining what is a “not de minimis payment” must consider the value of individual payments as well as the value of the total company payments per project. 151 147 See 2016 Adopting Release, Section II.C.3.c. The 2012 Rules also defined a “not de minimis” payment using the $100,000 threshold. See 2012 Adopting Release, Section II.D.2.c. 148 See, e.g., letter from Nouveau Inc. (Feb. 16, 2016) (stating that the $100,000 reporting threshold would be unreasonably low for companies working on massive scale projects and would require parties to engage in the costly collection, compilation, and standardization of potentially thousands of different data points); see also 2012 Adopting Release, Section II.D.2.b (discussing a variety of approaches suggested by commenters to the “not de minimis” payment requirement). 149 See infra Section II.F.2. 150 Section 13(q) does not define “not de minimis.” Consistent with the 2012 and 2016 rules, and for the reasons stated therein, we continue to believe that it is appropriate to adopt a definition of “not de minimis” to provide clear guidance regarding when a resource extraction issuer must disclose a payment. 151 See proposed Item 2.01(d)(8) of Form SD. Under the proposed rules, an issuer would not be required to provide disclosure if the aggregate project payments for all types of payments for an individual project are below $750,000. Where the aggregate payments for an individual project equal or exceed $750,000, only payments made to each foreign government in a host country or the Federal Government that equal or exceed $150,000, or its equivalent in the issuer's reporting currency, whether made as a single payment or a series of related payments, will need to be reported. 152 Thus, if no single payment or series of related payments of the same type equals or exceeds $150,000 for an individual project, even if the aggregate payments for that project are equal to or greater than $750,000, no payments disclosure would be required for that project. 152 See id. We believe that this change is necessary to take into account the proposed definition of project, which aggregates payments at a higher level, which would likely increase the value of the individual types of payments. As such, we believe that using the 2016 threshold of $100,000 would likely require more payment disclosure, thus increasing rather than decreasing the cost and disclosure burden on issuers, contrary to the guidance provided by Congress in its disapproval of the 2016 Rules. We further believe that, in light of the larger aggregations permitted under the revised definition of project, a quantitative standard based upon project level and individual payment information establishes a more appropriate threshold for determining “not de minimis.” In addition, we believe that $750,000 in total payments is the appropriate project threshold and $150,000 is the appropriate threshold for individual payments because we are proposing to exempt smaller reporting companies and emerging growth companies from the Section 13(q) disclosure requirements, 153 thereby resulting in larger companies, with larger projects and larger individual payments, being primarily affected by the proposed rules. We also believe that this “not de minimis” threshold would further the statutory objectives of Section 13(q) by requiring disclosure of those payments that are of a significant enough size such that they would likely benefit the host country and its local communities. 153 See supra Section II.J.3. When adopting the 2016 Rules, we observed that Section 13(q) uses a “not de minimis” standard instead of a materiality standard, which is used elsewhere in the Federal securities laws and in the EITI. This suggests that Congress did not intend “not de minimis” to equate to a materiality standard. 154 We continue to believe that this is the better approach to take when defining “not de minimis.” 154 See 2012 Rules Adopting Release, Section II.D.2.c. Some commenters suggested that we adopt a materiality-based definition of “not de minimis” in the 2012 rulemaking. See id., n. 224 and accompanying text. An instruction to the 2016 Rules allowed an issuer to choose several methods to calculate currency conversions for payments not made in U.S. dollars or the issuer's reporting currency. That instruction also provided that the same methods are available to issuers when calculating whether a payment not made in U.S. dollars exceeds the de minimis threshold. 155 We are proposing the same instruction 156 as we continue to believe that providing alternative methods for calculating currency conversions would help limit compliance costs under Section 13(q). Like the 2016 Rules, an issuer would be required to use a consistent method for its payment currency conversions, including when determining if a payment is not de minimis, and would be required to disclose which method it used. 157 155 See Instruction 2 to Item 2.01 of Form SD under the 2016 Rules. 156 See proposed Instruction 2 to Item 2.01 of Form SD, which states: “A resource extraction issuer must report the amount of payments made for each payment type, and the total amount of payments made for each project and to each government, during the reporting period in either U.S. dollars or the resource extraction issuer's reporting currency. If a resource extraction issuer has made payments in currencies other than U.S. dollars or its reporting currency, it may choose to calculate the currency conversion between the currency in which the payment was made and U.S. dollars or the resource extraction issuer's reporting currency, as applicable, in one of three ways: (a) By translating the expenses at the exchange rate existing at the time the payment is made; (b) using a weighted average of the exchange rates during the period; or (c) based on the exchange rate as of the resource extraction issuer's fiscal year end. When calculating whether the de minimis threshold has been exceeded, a resource extraction issuer may be required to convert the payment to U.S. dollars, even though it is not required to disclose those payments in U.S. dollars. For example, this may occur when the resource extraction issuer is using a non-U.S. dollar reporting currency. In these instances, the resource extraction issuer may use any of the three methods described above for calculating the currency conversion.” 157 See id. (stating that “[i]n all cases, a resource extraction issuer must disclose the method used to calculate the currency conversion and must choose a consistent method for all such currency conversions within a particular Form SD submission”). Request for Comment 23. The definition of “not de minimis” requires issuers to disclose payments for an individual project if the payments in the aggregate equal or exceed $750,000, unless no individual payments per that project equal or exceed $150,000. Is this approach appropriate in light of our proposed definition of “project,” which would allow for greater aggregation of payments? Should we instead continue to use the same quantitative threshold of $100,000 that we used in the 2016 and 2012 Rules without regard to the proposed definition of project? If it is appropriate to take into account the proposed definition of project, are there any data or have there been any developments since the 2016 Rules that suggest a quantitative threshold lower or higher than $750,000 is the more appropriate project threshold, or that an individual payment threshold lower or higher than $150,000 is the more appropriate threshold? 24. The statute does not define “not de minimis” or explain how that term should be applied. Should we base the “not de minimis” threshold on an amount that is not de minimis relative to (i) a particular resource extraction issuer, (ii) a particular country, or (iii) a particular project? 25. Should the focal point for determining whether a payment is “not de minimis” be the relationship between individual and total company payments per payment type? If not, what should the focal point be? Should we consider the relation of the payment to the government recipient and/or the local community when adopting the “not de minimis” payment threshold? 26. As an alternative to setting a bright line threshold based on dollar amount of payment, should we not define “not de minimis” and allow resource extraction issuers to make the determination of what qualifies as a payment that is not de minimis, based on the particular facts and circumstances? 27. If we should adopt an absolute quantitative threshold, should we include a mechanism to adjust periodically the de minimis threshold to reflect the effects of inflation? If so, what is an appropriate interval for such adjustments? What should the basis be for making any such adjustments if the appropriate focal point for determining whether a payment is “not de minimis” is in relation to the host country recipient? 28. Should we adopt a definition of “not de minimis” using a standard based on the materiality of the payment to the issuer? If so, would this be consistent with the language of the statute, which uses the term “not de minimis” rather than “material”? D. Anti-Evasion As under the 2016 Rules, the proposed rules would require disclosure with respect to an activity or payment that, although not within the categories included in the proposed rules, is part of a plan or scheme to evade the disclosure required under Section 13(q). 158 This provision is designed to emphasize substance over the form or characterization of payments. We believe that it covers most of the situations that have concerned commenters in past releases. For example, the provision would cover payments that were substituted for otherwise reportable payments in an attempt to evade the disclosure rules, 159 as well as activities and payments that were structured, split, or aggregated in an attempt to avoid application of the rules. 160 Similarly, 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. 158 See proposed Rule 13q-1(b). Several commenters supported this provision in the 2016 rulemaking although a few commenters recommended revising the provision to address specific concerns. See 2016 Adopting Release, Section II.C.2.c. 159 See, e.g., Letter from Elise J. Bean (Feb. 16, 2016). See also Section II.F below (discussing application of the anti-evasion provision in the context of the definition of “project” under the proposed rules). 160 See, e.g., Letter from PWYP-US (Feb. 16, 2016). Request for Comment 29. Should we adopt an anti-evasion provision, as proposed? Should we provide additional guidance about when the anti-evasion provision would apply? 30. Have there been any developments since the 2016 Rules that suggest that a different approach to the anti-evasion provision would be appropriate? E. Definition of “Subsidiary” and “Control” Section 13(q) requires a resource extraction issuer to disclose payments by a subsidiary or an entity under the control of the issuer. Similar to the 2016 Rules, the proposed rules would define the terms “subsidiary” and “control” based on accounting principles rather than using the definitions of those terms provided in Rule 12b-2, 161 which was the case under the 2012 Rules. 162 All of the commenters on the 2016 Rules Proposing Release that addressed this aspect of the proposed rules generally supported using accounting principles to define “control.” 163 161 Under Exchange Act Rule 12b-2 [17 CFR 240.12b-2], “control” (including the terms “controlling,” “controlled by” and “under common control with”) is defined to mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract, or otherwise. Rule 12b-2 also defines “subsidiary” of a specified person to mean 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. 162 See 2012 Adopting Release, Section II.D.4.c. 163 See, e.g., Letters from the API (Feb. 16, 2016); British Petroleum p.l.c. (Feb. 16, 2016); Chevron Corporation (Feb. 16, 2016); Encana; ExxonMobil (Feb. 16, 2016); Global Witness (Mar. 8, 2016); and PWYP-US (Feb. 16, 2016). Under the proposed approach, a resource extraction issuer would have “control” of another entity when the issuer consolidates that entity under the accounting principles applicable to its financial statements included in the periodic reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act. Thus, for purposes of determining control, the resource extraction issuer would follow the consolidation requirements under generally accepted accounting principles in the United States (“U.S. GAAP”) or under the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board, as applicable. 164 164 See Accounting Standards Codification (“ASC”) 810, Consolidation; and IFRS 10, Consolidated Financial Statements. 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. We believe that the proposed definition, compared to the use of the definition of “control” in Rule 12b-2, would better balance transparency for users of the payment disclosure and the burden on issuers. 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, 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 could 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. 165 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 proposed rules would be subject to the audit process as well as to the internal accounting controls that issuers are required to have in place with respect to reporting audited financial statements filed with the Commission. 166 165 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]. 166 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. The proposed rules would not require disclosure of the proportionate amount of the payments made by a resource extraction issuer's proportionately consolidated entities or operations. 167 After reconsidering the comments raising concern about the definition of control and the potential compliance costs associated with using a broader definition of control, the definition we are proposing would exclude entities or operations in which an issuer has only a proportionate interest. 168 Compared to an issuer that consolidates an entity, an issuer with a proportionate interest in an entity or operations may not have the same level of ability to direct the entity or operations making the payments. For example, as commenters have noted, an issuer that holds a proportionate interest in a joint venture typically does not have ready access to detailed payment information when it is not the operator of that venture. 169 Requiring such a non-operator issuer to provide the payment disclosure based on its proportionate interest in the venture could compel that issuer to renegotiate its joint venture agreement or make other arrangements to obtain sufficiently detailed payment information to comply with the Section 13(q) rules, which could significantly increase its compliance burden. Excluding proportionate interest entities or operations from the proposed definition of control would result in less payment information about joint ventures becoming public, 170 as compared to the 2016 Rules; however, we believe that this potential reduction in transparency is an appropriate tradeoff to help reduce the compliance burden of the proposed rules. 167 Proportionately consolidated entities or operations include those entities or operations that are proportionately consolidated in accordance with ASC 810-10-45-14 and “joint operations” as defined in IFRS 11, Joint Arrangements. 168 See, e.g., Letters from API (Feb. 16, 2016); BP (Feb. 16, 2016); Chevron (Feb. 16, 2016); ExxonMobil (Feb. 16, 2016); Petro1eo Brasileiro S.A-Petrobras (“Petrobras”) (Feb. 16, 2016); and RDS (Feb. 5, 2016). 169 See, e.g., Letters from API (Feb. 16, 2016); and ExxonMobil (Feb. 16, 2016). 170 See, e.g., Letters from PWYP-US (Feb. 16, 2016); and Global Witness (Mar. 8, 2016). We also reconsidered the recommendation of commenters on the 2016 Rules Proposing Release to include a “significant influence” test for determining control in addition to the accounting consolidation principles we are proposing. 171 We do not believe, however, that we should define control such that significant influence by itself would constitute control. 172 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. 171 See, e.g., Letter from PWYP-US (Feb. 16, 2016). 172 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. Request for Comment 31. Should we define the term “control” based on applicable accounting principles, as proposed? Should we alter our approach based on any developments since the adoption of the 2016 Rules or in light of our other proposals in this release? 32. Should we exclude from the definition of control entities or operations in which an issuer has only a proportionate interest, as proposed? Should we instead require an issuer to disclose its proportionate share of the payments made by a joint venture based on its proportionate interest in the venture even when it is not the operator of the venture? Should we require such a non-operator joint venture participant to disclose its proportionate share of the joint venture payments if it knows or is able to obtain the information necessary to comply with the proposed rules without undue difficulty or expense? 33. Are there alternatives to the proposed definition of control that would better balance transparency for users of the payment information and the compliance burden on issuers? For example, should we require only the operator of a joint venture to disclose all of the payments it makes to governments, including those made on behalf of non-operator joint venture participants? Should we require the operator of a joint venture to disclose its proportionate share of the payments made? When the operator is not an Exchange Act reporting company, and therefore not subject to the Section 13(q) rules, should each non-operator participant that is subject to the Section 13(q) rules be required to disclose the payments made by itself and entities or operations that it fully or proportionately consolidates or accounts for as a joint operation? In the event that none of the joint venture participants is a consolidated entity, should we require a registrant that owns a proportionate interest in the operator of the venture to disclose the payments made either on behalf of all the participants or based on the registrant's proportionate share of the venture? In these circumstances, should we require a registrant that owns a proportionate interest in a non-operator venture participant to disclose its proportionate share of the payments if it is able to obtain the necessary payment information without undue burden or expense? 34. Alternatively, should we adopt a definition of control that includes more than just consolidated entities ( e.g., entities over which an issuer has significant influence)? F. Definition of “Project” Consistent with Section 13(q), the proposed rules would require a resource extraction issuer to disclose payments made to governments relating to the commercial development of oil, natural gas, or minerals by type and total amount per project. The proposed rules would define “project” using the following three criteria: (1) The type of resource being commercially developed; (2) the method of extraction; and (3) the major subnational political jurisdiction where the commercial development of the resource is taking place. 173 The proposed definition (“Modified Project Definition”) differs from the definition included in the 2016 Rules, which defined “project” as the operational activities governed by a single contract, license, lease, concession, or similar agreement, which form the basis for payment liabilities with a government (“Contract-Level Project Definition”). 174 173 This proposed definition is similar to the definition of “project” suggested by one industry commenter. See Letters from the API (Nov. 7, 2013) and (Feb. 16, 2016). The term “project” as used in this release would only apply to disclosure provided pursuant to Rule 13q-1 and not, for example, the disclosure required by Article 4-10 of Regulation S-X (17 CFR 210.4-10) or subpart 1200 of Regulation S-K (17 CFR 229.1200). 174 2016 Rules Adopting Release, Section II.E.3. 1. Considerations for Modified “Project” Definition In adopting the 2016 Rules, the Commission expressly considered the Modified Project Definition as an alternative to the Contract-Level Project Definition that it ultimately adopted. In considering the Modified Project Definition, the Commission acknowledged that such a definition “could lower the potential for competitive harm when compared to [the Contract-Level Project Definition].” 175 However, the Commission stated that, in its view, the Contract-Level Project Definition was “on balance, necessary and appropriate notwithstanding the potential competitive concerns that may result in some instances.” 176 In doing so, the Commission acknowledged that both approaches would provide the public with information concerning “the overall revenue that national governments receive from natural resources, so that the public can seek to hold the government accountable for how much it is receiving and how it spends that money.” 177 Nevertheless, the Commission determined that the more granular transparency provided by the Contract-Level Project Definition could potentially go further in combating corruption. Specifically, the Commission found that the Contract-Level Project Definition, by providing transparency about the revenues generated from each contract, license, and concession, could serve to reduce the potential for corruption in connection with the negotiation and implementation of a resource-extraction contract. 178 In this way, the Contract-Level Project Definition could minimize instances of corruption that may occur before resource-extraction revenue is paid to the government. 175 Id. 176 Id. 177 Id. 178 Among other things, the Commission found that the Contract-Level Project Definition had the advantage that, in some instances, it could combat corruption by: (1) “help[ing] assist citizens, civil society groups, and others to monitor individual companies' contributions to the public finances and ensur[ing] firms are meeting their payment obligations,” at least “[t]o the extent that a company's contractual or legal obligations are known”; (2) deterring “companies from either entering into agreements that contain suspect payment provisions or following government officials' suspect payment instructions”; (3) “help[ing] local communities an [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-28407. Public record. Not legal advice.