Disclosure of Payments by Resource Extraction Issuers

Federal RegisterJan 15, 2021

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249b

[Release No. 34-90679; File No. S7-24-19]

RIN 3235-AM06

Disclosure of Payments by Resource Extraction Issuers

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

We are adopting a rule under the Securities Exchange Act of 1934 (“Exchange Act”) and an amendment to Form SD to implement Section 13(q) of the Exchange Act. 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:

Effective date:

The final rule and form amendment are effective March 16, 2021.

Compliance date: See

Section II.O. for further information on transitioning to the final rules.

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 17 CFR 240.13q-1 and an amendment 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 17 CFR 240.13q-1 and an amendment 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 proposed 17 CFR 240.13q-1 and an amendment to Form SD under the Exchange Act

on December 18, 2019. We are now adopting 17 CFR 240.13q-1 (“Rule 13q-1”) and an amendment to Form SD

under the Exchange Act largely as proposed.

15 U.S.C. 78a

et seq.

17 CFR 249b.400.

Table of Contents

I. Background

A. Section 13(q) of the Exchange Act

B. Prior Section 13(q) Rulemakings and Congress's Actions Under the Congressional Review Act

C. Summary of the Final Rules

II. Final Rules Under Section 13(q)

A. Definition of “Project”

1. Comments and Considerations Regarding the Modified Project Definition

2. Discussion of the Modified Project Definition

B. Public Reporting

1. Public Disclosure of the Issuer's Payment Information, Including the Issuer's Name

2. Public Compilation

C. Definition of a “Not De Minimis” Payment

D. 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. Delayed Reporting 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

E. Definition of “Subsidiary” and “Control”

F. Treatment for Purposes of the Exchange Act and Securities Act

G. Definitions of “Foreign Government” and “Federal Government”

H. Definition of “Resource Extraction Issuer”

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

1. “Extraction” and “Processing”

2. “Export”

3. “Minerals”

J. 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. Accounting Considerations

K. Anti-Evasion

L. Annual Report Requirement

1. Form SD

2. Annual Deadline for Form SD

M. Exhibits and Interactive Data Format Requirements

N. Alternative Reporting

1. Alternative Reporting Requirements

2. Recognition of EU Directives, U.K.'s Reports on Payments to Governments Regulations, Norway's Regulations on Country-by-Country Reporting, and Canada's ESTMA as Alternative Reporting Regimes

O. Compliance Date

P. Other Matters

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 Rulemaking

IV. Paperwork Reduction Act

A. Background

B. Estimate of Issuers

C. Estimate of Issuer Burdens

V. Regulatory Flexibility Act Certification

VI. Statutory Authority

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.

Congress enacted Section 1504 to increase the transparency of payments made by oil, natural gas, and mining companies

to governments for the purpose of the commercial development of oil, natural gas, and minerals.

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

The disclosure requirements mandated by Section 13(q) only apply to oil, natural gas and mining companies that are required to file reports under Section 13 or 15(d) of the Securities Exchange Act of 1934.

See

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

According to Senator Richard Lugar, who co-sponsored the amendment that was the basis for this statutory provision, a goal 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.”

See

156 Cong. Rec. S3816 (daily ed. May 17, 2010).

Section 13(q) directs the Commission to issue final rules that require each resource extraction issuer to include in an annual report information relating to payments 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.

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

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;

15 U.S.C. 78m(q)(1)(D). Given this definition of “resource extraction issuer,” the use of the Commission's disclosure rules to achieve the transparency goals of Section 13(q) is inherently limited because the statute only applies to Exchange Act reporting companies. In contrast, the resource extraction reporting regimes of the European Union and Canada include registered companies as well as private companies of a certain specified size that are domiciled in their jurisdictions.

See infra

at Section III.C.

• “Commercial development of oil, natural gas, or minerals” includes exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, or the acquisition of a license for any such activity, as determined by the Commission;

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

• “Foreign government” means a foreign government, a department, agency or instrumentality of a foreign government, or a company owned by a foreign government, as determined by the Commission;

and

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

• “Payment” means a payment that:

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

○ Is not de minimis; and

○ Includes taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits, that the Commission, consistent with the guidelines of the Extractive Industries Transparency Initiative (the “EITI”)

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

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.

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

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

using an interactive data standard established by the Commission.

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

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.

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:

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

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

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

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

• 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.

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

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.

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.

The statute does not define the term compilation.

Id.

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

Section 13(q) further 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.”

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.

15 U.S.C. 78m(q)(2)(E). The rules we are adopting in this release are consistent with this requirement, as explained throughout this adopting release. Although the new rules differ from those of the European Union and Canada in certain respects (including the definition of “project”), neither Section 13(q)(2)(E) nor any other provision of law requires the Commission to adopt identical or significantly similar rules to those adopted by other foreign governments. When the Commission did adopt rules that were significantly similar to those of the European Union and Canada, Congress disapproved those rules.

In 2013, the European Parliament and Council of the European Union (“EU”) adopted two directives that include payment disclosure rules. The EU Accounting Directive and the EU Transparency Directive (the “EU Directives”) established the baseline in each EU member state and European Economic Area (“EEA”) country for annual disclosure requirements for oil, gas, mining, and logging companies concerning the payments made to governments on a per country and per project basis. All EU member states have implemented both of the EU Directives. The UK adopted its “Reports on Payments to Governments Regulations 2014” to implement the EU Directives, which remains effective following the UK's withdrawal from the EU. Norway adopted regulations similar to the EU Directives in 2013. Canada adopted a federal resource extraction disclosure law, the Extractive Sector Transparency Measures Act (“ESTMA”), in 2015. For further information about these international transparency promotion efforts,

see

Section I.B. of Release No. 34-87783 (Dec. 18, 2019) [85 FR 2522 (Jan. 15, 2020)] (“2019 Rules Proposing Release”).

See

15 U.S.C. 78m(q)(2)(E). Although the United States became an EITI candidate country in 2014, it withdrew as an EITI implementing country in 2017.

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”), which is available at

https://www.doi.gov/sites/doi.gov/files/uploads/eiti_withdraw.pdf.

The United States has, however, maintained its status as a supporting country of the EITI.

B. Prior Section 13(q) Rulemakings and Congress's Actions Under the Congressional Review Act

On August 22, 2012, the Commission adopted Rule 13q-1 and amendments to Form SD (the “2012 Rules”).

The 2012 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 (the “2016 Rules”) that addressed the concerns raised in the prior litigation.

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.

See API

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.

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

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.”).

Some members who voted in favor of the disapproval nonetheless reiterated support for 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.”

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 “American and other SEC-registered companies” at a significant competitive disadvantage.

See

letter from Senator Bob Corker, Senator Susan Collins, Senator Marco Rubio, Senator Johnny Isakson, Senator Lindsey Graham, Senator Todd Young (Feb. 2, 2017) (“Sen. Corker

et al.

”),

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

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.

Under the CRA, however, the Commission may not reissue the disapproved rule in “substantially the same form” or issue a new rule that is “substantially the same” as the disapproved rule.

The CRA does not define “substantially the same form” or “substantially the same” and courts have not provided guidance on this issue. We therefore look to the plain meaning of the term “substantially,” which is “to a large degree”

or “to a great extent.”

While providing general guidance for comparing a new final rule to the rule that Congress disapproved pursuant to the CRA, this construct does not provide guidance regarding the specific textual revisions or policy adjustments that the Commission should make to the disapproved rule. We also recognize that, in the context of a mandatory rulemaking such as Section 13(q) requires, there generally is not one “correct” approach. As a result of the combination of these factors, we believe that determining the path forward falls to the agency assigned to undertake the mandatory rulemaking and that the agency should exercise its reasoned judgment in shaping new rules, evaluating a reasonable range of potential responses, including by considering the statutory provision that compels the rulemaking, the administrative record, and the CRA's requirements, among other things.

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.”).

See

5 U.S.C. 801(b)(2). (“A rule that does not take effect (or does not continue) . . . may not be reissued in substantially the same form, and a new rule that is substantially the same as such a rule may not be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”).

See

Cambridge Dictionary (Cambridge University Press) (2020).

See

Oxford English Dictionary (Oxford University Press) (2020).

We received a number of comments on our approach to satisfying the statutory mandate in Section 13(q) in a manner that also adheres to the CRA's requirements.

Some commenters generally supported the Commission's approach regarding the CRA.

Several commenters, however, argued that the Commission interpreted the impact of the CRA resolution too broadly and gave too much emphasis to statements from members of Congress who supported the resolution.

Several commenters added that the economic concerns expressed during the CRA floor debates (particularly related to costs and competiveness) have been ameliorated by international developments, eliminating or at least reducing the need to change the substance of the final rules to address those consequences.

According to these commenters, the Commission (1) incorrectly concluded that the CRA resolution restricted its discretion when issuing new rules under Section 13(q) and (2) improperly relied on the CRA resolution to justify proposing rules that do not provide the level of disclosure needed to achieve the objectives of Section 13(q).

See, e.g.,

letters from Center for Progressive Reform (Mar. 16, 2020); Cary Coglianese (Mar. 16, 2020); Oxfam America and Earthrights International (Mar. 23, 2020); and PWYP-US (Mar. 16, 2020).

See, e.g.,

letter from National Association of Manufacturers (Mar. 16, 2020) (NAM) (stating that the proposed rule represents a tailored implementation of the statute and includes numerous important reforms from the 2016 proposal that faced disapproval from Congress).

See, e.g.,

letters from Oxfam America and Earthrights International; PWYP-US (Mar. 16, 2020); and Sierra Club (March 14, 2020).

See id.

See, e.g.,

letters from Center for Progressive Reform; Cary Coglianese; Oxfam America and Earthrights International; and PWYP-US (Mar. 16, 2020).

The CRA resolution does not modify the Section 13(q) mandate that the Commission issue rules regarding the disclosure of resource extraction payments. It does, however, as set forth above, restrict somewhat our discretion regarding the form that those rules may take.

Thus, we believe our task is to exercise our discretion to craft and issue a new rule that reasonably achieves the objectives of Section 13(q) within the narrower range of available approaches imposed by the CRA.

For example, by the plain terms of the CRA, it seems apparent that the Commission, at a minimum, could not simply readopt the disapproved rule.

Some commenters expressed the view that we could readopt the 2016 Rules with only minor modifications and still satisfy the CRA.

According to these commenters, it would be sufficient for the Commission to readopt most of the 2016 Rules while primarily modifying the rationales for or the economic analysis set forth in the prior rulemaking.

This approach, in our view, is inconsistent with the plain language of the CRA, which instructs that the “new rule” itself may not be substantially the same. Based on the plain language of the CRA, the Commission in our view is required to do more than substantially revise the rationales (including the economic analysis) in the adopting release accompanying the disapproved rule.

Rather, we believe that a better understanding of the CRA is that it requires us to make sufficient changes to the substantive operation of (including the requirements imposed by) the rule itself to meet the CRA mandate. Based on that general understanding, we believe that an appropriate and reasonable way to assess the CRA's not “substantially the same” requirement in the context of a disclosure-oriented provision such as Section 13(q) is primarily by comparing the extent to which the disclosures under the disapproved rule would differ from the disclosures under the new rule.

The CRA disapproval process is not a routine or perfunctory process. To disapprove a rule under the CRA, the support of a majority of both houses of Congress and the assent of the President is required, which taken together reflects a significant undertaking on the part of two elected branches of the Federal government. Based on the foregoing alone, it seems doubtful that the appropriate response to a CRA disapproval should be mere minor modifications.

See, e.g.,

letters from Oxfam America and Earthrights International; and PWYP-US (Mar. 16, 2020).

Revising the economic analysis from the 2016 adopting release would not in our view satisfy the CRA. The economic analysis was not part of the substantive rule because it neither imposed any legally enforceable obligations, nor provided any rights or benefits. Further, the economic analysis did not otherwise purport to offer the Commission's interpretation of any statutory provision or agency rule, nor did it set forth any general statements of agency policy, or establish any rules of agency organization, procedure, or practice. Rather, the economic analysis in the adopting release served to memorialize the Commission's understanding and consideration of the economic implications of the 2016 Rules. Moreover, even if in theory changing the economic analysis to include revised cost estimates might be sufficient in some cases to satisfy the CRA, we nonetheless disagree that a change in the economic analysis would be sufficient in this particular case. The argument put forward by some commenters is that the projected costs and competitive burdens included in the 2016 Rules Adopting Release were too high.

See id.

The costs and competitive burdens were, however, only one component of the considerations on which the Commission based the 2016 Rules. As the 2016 Rules Adopting Release explained, the economic impact of the 2016 Rules was relevant, but not determinative.

See

2016 Rules Adopting Release at Sections II.B and C. Thus, merely revising the economic analysis and retaining the myriad other reasons that led the Commission to adopt the granular public disclosure model, and largely reissuing the same rule, would not, in our view, satisfy the CRA requirement. Any such rule, including the underlying analysis, would continue to be in substantially the same form as the disapproved rule.

We recognize, as discussed in Section III.A below, that economic and other considerations relevant to Section 13(q) have continued to evolve since the 2016 Rules were adopted. Specifically, data and other information concerning the subsequent experiences of resource extraction issuers operating under foreign disclosure regimes that are similar to the disapproved 2016 Rules indicate that the potential compliance costs and competitive harm associated with the disclosures may be less than the Commission had projected at the time that it issued the 2016 Rules. Even if these external facts could be considered to have significantly mitigated such concerns, they do not eliminate the CRA mandate that

the new rule

cannot be substantially the same as the disapproved rule. In formulating the final rules, however, we have considered the developments in international payment reporting regimes, including the extent to which they might provide additional insights regarding the potential costs and competitive effects of project-level disclosures.

Commenters also argued that readopting a new rule that included essentially the same (or similar) core discretionary components of the 2016 rulemaking would satisfy the CRA provided that the Commission made adjustments to a significant number of the ancillary or secondary components of the rule.

In the context of the Section 13(q) disclosure provision, however, we are not persuaded that ancillary or secondary adjustments would satisfy the CRA requirement that the new rule cannot be substantially the same as the disapproved rule. Various changes to the ancillary or secondary components of the 2016 Rules, alone and in combination, generally would yield a very similar disclosure model and thus result in payment disclosures substantially the same as those required by the 2016 Rules.

See, e.g.,

letters from Oxfam America and Earthrights International; and PWYP-US (Mar. 16, 2020).

Rather, we believe that, in the context of Section 13(q), producing a rule that is not “substantially the same” as the disapproved rule is reasonably achieved by changing at least one of the two central discretionary determinations at the heart of the Section 13(q) disclosure system that the Commission made when it issued the 2016 Rules. Based on the administrative record and our understanding of Section 13(q), we believe that the two central determinations over which the Commission has discretionary authority are (1) publication of issuers' payment disclosures versus anonymization and (2) the relative granularity of the definition of “project.” Modifying the other discretionary determinations available in this particular rulemaking, in our view, likely would fail to produce a rule that is not substantially the same as the disapproved rule given the level of similarity that would remain between the disclosures under the new rule and those that would have resulted under the disapproved rule. Moreover, given our obligations under the CRA and based on our review of the administrative record, we believe that the final rules reasonably satisfy the statutory requirements of Section 13(q).

As discussed below, we believe that, of these two core discretionary determinations, the change that more effectively achieves Section 13(q)'s goal of increasing transparency with respect to extractive payments by resource extraction issuers while adhering to the requirements of the CRA, is to modify the project definition so that it requires less granularity in the payment disclosures than in the disapproved rule. In choosing to make this change, we are mindful of Section 13(q)'s goal, which could be significantly limited by anonymization. For reasons discussed in more detail below, we believe the final rules we are adopting appropriately comply with the CRA's not “substantially the same” rule requirement, and do so in a manner that reasonably achieves the objectives of Section 13(q) within the CRA's constraints.

Finally, we believe that the form and manner of the revision to the project definition is not just a reasonable change within our discretion to implement Section 13(q), but also one that alone is sufficient to comply with the CRA's requirements that the disapproved rule not be reissued in “substantially the same form” and a new rule may not be “substantially the same” as the disapproved rule. Accordingly, while we are making

various other changes to more ancillary or secondary matters that could further support our efforts to comply with the CRA's requirements, these changes are motivated by policy considerations and the administrative record.

Nevertheless, even if a modified definition of project alone were insufficient to comply with the CRA, given these other changes, we believe that the final rules, when considered as a whole, comply with the CRA's restriction on subsequent rulemaking. To be clear, however, we did not make these other changes in response to the CRA, but rather on independent policy grounds.

C. Summary of the Final Rules

We are adopting rules to implement Section 13(q) largely as proposed, with some modifications in response to comments received. As we previously explained, given the requirements of Section 13(q), certain elements of the final rules remain unchanged from the 2016 Rules.

In light of the changes that we have made, as discussed below, the fact that certain elements remain the same does not change our belief that the final rules are not substantially the same as the 2016 Rules and therefore are in compliance with the CRA's restriction on subsequent rulemaking.

See

2019 Rules Proposing Release at Section I.C.3. For example, we proposed, and are adopting, the same delayed reporting provision for exploratory activities, the same transitional relief for recently acquired companies, and a similar alternative reporting mechanism, all of which were adopted in 2016.

See infra

Sections II.D. and N. We also are adopting, as proposed, the same definitions as adopted in 2016 for “resource extraction issuer,” “commercial development of oil, natural gas, or minerals,” “payment,” and “foreign government.”

See infra

Sections II.G-J. As further discussed below, most commenters who addressed those definitions in the 2016 rulemaking generally supported them, and most submitting comments on the 2019 Rules Proposing Release either supported the definitions or chose not to address them.

In this regard, the final rules include several changes from the 2016 Rules. Most notably, the final rules will revise the definition of the term “project,” a term that was not statutorily defined, to require disclosure at the national and major subnational political jurisdiction, as opposed to the contract-level disclosure as required by the disapproved rule. Because the definition of “project” plays a central role in Section 13(q)'s disclosure regime, we believe that changing this definition is sufficient for meeting the CRA's mandate that the new rule not be substantially the same as the disapproved rule.

Some commenters have suggested that changing other aspects of the 2016 Rules, such as the definition of “control,” would equally fulfill the CRA mandate.

As discussed above, however, we believe that these suggested changes, some of which we are adopting, constitute relatively minor modifications that, by themselves, would not effect a substantial difference from the disapproved rule.

See infra

Section II.A.

See, e.g.,

letters from Oxfam America and Earthrights International; and PWYP-US (Mar. 16, 2020).

In addition to changing the project definition, the final rules will:

• Add two new conditional exemptions for situations in which a foreign law or a pre-existing contract prohibits the required disclosure;

See infra

Section II.D.1.-2.

• Add an exemption for smaller reporting companies and emerging growth companies;

See infra

Section II.D.3.

• Revise the definition of “control” to exclude entities or operations in which an issuer has a proportionate interest;

See infra

Section II.E.

• Limit the liability for the required disclosure by deeming the payment information to be furnished to, but not filed with, the Commission;

See infra

Section II.F.

• Add relief for issuers that have recently completed their U.S. initial public offerings;

and

See infra

Section II.D.6.

• Extend the deadline for furnishing the payment disclosures.

See infra

Section II.L.2.

We believe the final rules are reasonably designed to achieve the transparency goals of Section 13(q). For example, the final rules will require the public disclosure of the payment information, including the identity of the issuer.

We considered the alternative approach suggested by some commenters that would enable issuers to submit the payment information non-publicly, which would then be published in an anonymized compilation by the Commission.

Although this approach would constitute a significant difference from the 2016 Rules and would be within our discretionary authority, we determined not to adopt this approach because we believe doing so could limit the transparency and related objectives of Section 13(q).

See infra

Section II.B. Other aspects of the final rules that are reasonably likely to achieve the transparency goals of Section 13(q) include adding infrastructure payments, social or community payments, and certain dividend payments to the statutorily required payment types.

See infra

Section II.J.

See, e.g.,

letter from API (Mar. 16, 2020).

See infra

Section II.B.

In contrast, although the changed project definition would diminish the granularity of disclosure compared to a contract-based definition, we believe that the final rules, taken as a whole, will achieve the transparency and related goals of Section 13(q) by providing significant and useful payment information regarding resource extraction payment flows from reporting companies to foreign governments. Transparency-enhancing changes from the proposed rules include our adoption of the $100,000 threshold in the definition of a “not de minimis” payment

and the requirement to disclose the amount of payments by payment type for, and identify, each subnational government payee.

See infra

Section II.C.

See infra

Section II.G.

The following chart summarizes the primary changes in the proposed and final rules compared to the 2016 Rules:

Issue

2016 Rules

(disapproved)

Proposed rules

Final 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.

• Same as proposed.

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 the same type of payments permitted at major subnational jurisdiction level, which must be identified;

• Aggregation at major subnational jurisdiction level (same as proposed).

• Aggregation of the same type of payments permitted at levels below major subnational level, which may be described generically (

e.g.,

as county or municipality).

• Issuer may aggregate payments by payment type, but must disclose aggregated amount for each subnational government payee and identify each subnational government payee.

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-effectiveness) contract terms that prohibit disclosure.

• Same as proposed.

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.

• Same as proposed, but limit exemption to companies not subject to an alternative reporting regime, which has been deemed by the Commission to require disclosure that satisfies the transparency objectives of Section 13(q).

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.

• Same as proposed.

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.

• Same as proposed.

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.

• Same as proposed.

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.

• 2 year transition period during which no Form SD due.

• Following transition period, Form SD due no later than 270 days after the end of the issuer's fiscal year.

II. Final Rules Under Section 13(q)

We received over 70 letters on the 2019 Proposed Rules from a range of commenters that included companies; trade associations; not-for-profit, non-governmental organizations (“NGOs”); members of Congress; and investors.

When developing these final rules, we have considered these comments while keeping in mind the transparency and related objectives of Section 13(q), the disapproval of the 2016 Rules under the CRA, and the CRA requirement not to adopt a new rule that is “substantially the same” as the disapproved rule.

These comment letters are available at

https://www.sec.gov/comments/s7-24-19/s72419.htm.

In this section, we first discuss the final rule provisions that, based on the large number of comments that addressed them, involve issues that we believe are the most critical in this rulemaking. Those issues include the definition of “project” and the related issue concerning the aggregation of payments, the definition of a “not de minimis” payment, whether to include exemptions (and the nature of any exemptions), whether the Section 13(q) disclosures must be public and include the identity of the issuer, the definitions of “subsidiary” and “control,” and the treatment of the Section 13(q) disclosures for purposes of liability under the Exchange Act and Securities Act.

While, as discussed below, we believe that the revised definition of project is both necessary and sufficient to satisfy the CRA, we note that several of the other provisions also represent changes from the 2016 rules. Thus, even if the revised project definition were not

sufficient, this change when considered with the other changes we are making should satisfy the CRA's mandate.

See infra

Sections II.A. through II.F.

We then discuss final rule provisions that received fewer comments but are nonetheless important to the statutory scheme. These include the definition of “resource extraction issuer,”

the definition of “payment,”

and the interactive data format requirement for the Section 13(q) disclosure.

See infra

Section II.H.

See infra

Section II.J.

See infra

Section II.M.

Before we discuss the specific components of the new rules, we acknowledge that some commenters suggested that in the Proposing Release the Commission unduly relied on various floor statements made by members of Congress during the CRA votes to disapprove the 2016 Rules. The floor statements in question dealt with the potential high cost and competitive harm that could flow from the 2016 Rules. Commenters have identified a number of reasons why they believe these congressional floor statements are not relevant to the current rulemaking, including: (1) These floor statements are not necessarily consistent with the views of most members of Congress and are not legally binding in any case; (2) the floor statements themselves give no clear indication of how the Commission should modify the rules; and (3) the concerns expressed in these floor statements about costs and competitive effects may be based on estimates and economic analyses in the 2016 Rules Adopting Release that have been called into question by actual cost data and information regarding the potential anti-competitive effects derived from resource extraction issuers' experiences with the disclosure regimes in Europe and Canada.

See

letter from Oxfam America and Earthrights International (stating that other regulators have conducted reviews of implementation of alternative reporting regimes and found that no material competitive or compliance impacts have thus far been documented);

see also

European Commission,

Review of country-by-country reporting requirements for extractive and logging industries

(Final report) (2018).

When the Commission adopted the 2016 Rules, it reasonably relied on the data available to it in the administrative record and that data may have informed the views subsequently expressed by members of Congress regarding the projected potentially high costs and significant risk of competitive harm as a result of the implementation of Section 13(q). Since that time, however, additional data and other information that has become available regarding resource extraction companies' experiences with the European and Canadian disclosure regimes indicate that the cost and anti-competitive effects of payment disclosure, while still relevant considerations,

may well be lower than the Commission projected in 2016.

See generally

Exchange Act Sections 3(f) and 23(a)(2).

See

Section III.D.11 below.

Thus, in formulating the final rules (and in contrast to our approach in the proposing release), we have not based our discretionary determinations for the final rules on previously expressed concerns, including from various members of Congress, about the economic effects of the 2016 Rules (although we do acknowledge various points where those concerns may align with our discretionary determinations). Instead, we have been informed by the comments received on the Proposing Release and our own evaluation of the potential economic and other effects of the final rules. Having considered the totality of the record before us, and for the reasons set forth below, we believe the final rules represent an appropriate and faithful implementation of the Section 13(q) disclosure provision while, at the same time, complying with the CRA and reflecting a reasoned exercise of our discretionary authority to make sound policy choices based on the administrative record.

A. Definition of “Project”

Consistent with Section 13(q), the final rules will 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. We are adopting, as proposed, the definition of “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.

This 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”).

This definition is similar to the definition of “project” previously 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 will 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 or 1300 of Regulation S-K (17 CFR 229.1200 or 229.1300).

See

2016 Rules Adopting Release at Section II.E.3.

1. Comments and Considerations Regarding the Modified Project Definition

Several commenters supported adoption of the proposed Modified Project Definition.

For example, one commenter stated that it represented the best method for reducing regulatory costs and unnecessary exposure of issuers' competitively sensitive data while promoting transparency.

Another commenter indicated that the proposed project definition would address the concerns some market participants have raised about overly descriptive disclosures revealing competitively sensitive information,

and, by allowing for increased aggregation of payments, would also reduce the cost burden of the Section 13(q) disclosure requirement.

A third commenter stated that the proposed project definition would achieve an appropriate balance that promotes transparency from extraction payments while reducing the regulatory burden anticipated to result from the 2016 Rules.

See

letters from API (Mar. 16, 2020); Chamber of Commerce (Mar. 16, 2020) (Chamber); NAM; Petrobras (Mar. 16, 2020); and Shareholder Advocacy Forum (Mar. 16, 2020) (SAF).

See

letter from API (Mar. 16, 2020). When recommending that the Commission adopt the non-public submission and anonymized compilation approach, however, this commenter stated that reverse engineering was possible even under the Modified Project Definition.

See id.

We address this comment in Section II.B.1.

infra.

See

letter from NAM.

See id.

See

letter from SAF.

Other commenters opposed the Modified Project Definition for several reasons,

including the following:

See, e.g.,

letter from Sens. Benjamin L. Cardin, Sherrod Brown, Richard J. Durbin, Edward J. Markey, Jeffrey A. Merkley, Sheldon Whitehouse, Patrick Leahy, Elizabeth Warren, Christopher A. Coons, and Jeanne Shaheen (Mar. 11, 2020) (Sens. Cardin

et al.

); letter from Oxfam in Kenya (Mar. 16, 2020); letter from PolicyAlert! (Feb. 27, 2020); letter from PWYP-US (Mar. 16, 2020); and letter from Sens. Benjamin L. Cardin and Richard J. Durbin (Dec. 11, 2020) (Sens. Cardin and Durbin).

• Some indicated that the Modified Project Definition would fail to produce the transparency necessary to enable citizens to detect corruption and demand accountability from their host governments as Congress intended.

See, e.g.,

letter from PWYP-US (Mar. 16, 2020);

see also

letters from Sens. Cardin

et al;

and Sens. Cardin and Durbin. Several other commenters emphasized the need for disaggregated payment disclosure as an anti-corruption tool in various countries.

See, e.g.,

letter from EG Justice (Mar. 11, 2020) (describing the corruption in Equatorial Guinea); letter from the Carter Center (Mar. 16,

2020) (discussing the need for a contract-based definition of project to combat corruption in the Democratic Republic of the Congo); and letters from Daniel Kaufmann (May 1, 2020), One.org (Mar. 24, 2020), and Eric Postel (Mar. 19, 2020) (each generally discussing the importance of disaggregated, granular reporting as an anti-corruption tool).

• Some pointed to a study that showed that a large amount of payment data would be lost under the Modified Project Definition if the proposed “not de minimis” thresholds were adopted.

See, e.g.,

letter from PWYP-US (Mar. 16, 2020); and Oxfam America and Earthrights International. We discuss these comments and the referenced study in greater detail in Section II.C.

• Some believed that because the Modified Project Definition would allow issuers to report payments in the aggregate, at the country and major subnational level, without requiring disclosure of the contract or license that gave rise to the payments, it would limit the utility of the reported payment data for citizens in resource-rich countries with revenue-sharing laws.

According to these commenters, the Modified Project Definition would particularly impact citizens residing in countries with revenue-sharing laws that require the national government to distribute a portion of the revenues received from extractive activities to subnational governments or local communities.

See

letter from PWYP-US (Mar. 16, 2020);

see also

letters from Sens. Cardin

et al.;

and Congr. Waters

et al. See also

letters from Friends of the Nation; Iraqi Transparency Alliance for Extractive Industries (Mar. 10, 2020) (“Iraqi Transparency Alliance”); Kenya Civil Society Platform Oil and Gas and PWYP-Kenya (Mar. 16, 2020) (“KCSPOG”); Oxfam in Kenya; PWYP-Burkina Faso (Apr. 22, 2020); PWYP-Indonesia (Mar. 16, 2020); and PWYP-US (Mar. 16, 2020).

• Some opposed the Modified Project Definition because in their opinion it is an arbitrary construction that does not reflect standard industry practice.

See, e.g.,

letter from PWYP-US (Mar. 16, 2020);

see also

letters from Elise J. Bean (Apr. 29, 2020); and Alan Detheridge (Mar. 15, 2020).

• Some stated that the Modified Project Definition deviates from what has become the international norm for a project definition in payments-to-governments reporting, namely, a project definition based on a single contract, license, lease, or concession.

See, e.g.,

letter from PWYP-US (Mar. 16, 2020);

see also

letters from Oxfam America and Earthrights International; and ONE Campaign (Mar. 16, 2016).

• Some argued that the Modified Project Definition does not satisfy the plain language of Section 13(q).

See, e.g.,

letter from Oxfam America and Earthrights International.

• Finally, some indicated that investors need contract-based data to assess a resource extraction issuer's future cash flows and other indices of risk.

See, e.g.,

letter from PWYP-US (Mar. 16, 2020);

see also

letter from Frederic Samama, Steve Waygood, Vicki Bakhshi, Helena Viñes Fiestas, John Wilson, Meryam Omi, Christopher P. Conkey, and Katarina Hammar (Mar. 16, 2020) (F. Samama

et al.

As discussed below, we believe that the Modified Project Definition that we are adopting will achieve Section 13(q)'s statutory mandate by increasing transparency regarding resource extraction payments while also ensuring that the final rules comply with the requirements of the CRA.

A key threshold issue, however, is the application of the CRA in the context of Section 13(q). As discussed above, we believe that there are only two discretionary aspects of the Section 13(q) rules where we can make a change that will likely achieve compliance with the CRA mandate against issuing a rule that is substantially the same as the disapproved rule: The definition of project or changing from a public filing to an anonymized compilation.

Without a change to one of these two aspects, we believe it is unlikely that the final rules would satisfy the CRA mandate. Although changing from a public filing to an anonymized compilation would likely satisfy the CRA mandate, for the reasons we discuss in Section II.B.1. below, we believe it is a less effective option for achieving Section 13(q)'s mandated transparency goals.

Thus, in light of our decision to require public disclosure of payment information, and not change to an anonymized compilation, we believe that making a significant change to the definition of project is warranted in order for the disclosure regime under the final rules not to be substantially the same as that under the disapproved 2016 Rules.

The Modified Project Definition that we are adopting is an alternative that was available to the Commission in the reasonable exercise of its discretion when it sought to implement the Section 13(q) rules in 2012 and 2016. Although the Commission chose not to use this definition in its prior rulemakings, we view the Modified Project Definition as fully consistent with the structure and purpose of Section 13(q). To the extent that the Commission may have suggested otherwise in 2016, we believe that was incorrect for the reasons explained below.

See supra

Section I.B.

We do not read Section 13(q) to preclude an anonymized compilation as a legal matter and as such believe that an anonymized compilation would be within our statutory discretion to adopt. Although an anonymized compilation would likely not allow users of the data to know the specific issuer to which any project-payment disclosures might relate, we do not read Section 13(q) to require such disclosure. Thus, for example, the definition of project that we are adopting could be coupled with an anonymized disclosure, with project payments disclosed in the compilation, but not in a manner that would clearly identify the issuer making the payments for the specific project. As discussed below, however, we do not believe that this would advance the transparency goals of Section 13(q) to the same extent as we believe our Modified Project Definition will.

By adopting the Modified Project Definition, we are establishing the minimum level of disclosure that a resource extraction issuer must provide concerning its projects. We recognize that some resource extraction issuers have expressed a commitment to following the more granular model of reporting adopted by the EU countries, Norway, and Canada.

See, e.g.,

letters from BHP (Mar. 16, 2020); BP America, Inc. (Mar. 13, 2020); Eni (Mar. 25, 2020); Equinor ASA (Mar. 13, 2020); Kosmos Energy (Feb. 19, 2020); Ovintiv (Mar. 16, 2020); Rio Tinto (Mar. 16, 2020); and Total (Feb. 10, 2020). As discussed below, issuers may elect to furnish reports prepared under these foreign transparency regimes to satisfy their Section 13(q) reporting obligations pursuant to the alternative reporting provision we are adopting. In addition, there is nothing in the approach that we are taking that would preclude such issuers from providing additional disclosure concerning their projects,

e.g.,

by disclosing payments at a level below the major subnational government level, outside of the Form SD. For example, such issuers could provide the disclosure on their website, in annual or periodic reports, or in a Form 8-K or Form 6-K.

Although we believe that a significant change to the definition of project is warranted, we acknowledge that the CRA does not compel us to adopt any particular definition of project within the range of definitions that would lead to rules that are not “substantially the same” as the disapproved 2016 Rules. Thus, we have based our determination to adopt the Modified Project Definition on various policy considerations that are tied to Section 13(q) and its goals.

We are not aware of, and commenters have not identified, any uniform or generally accepted definition of “project.” We have sought to provide a definition that both complies with the requirements imposed by the CRA and reasonably achieves the goals of Section 13(q), taking into account the views of resource extraction issuers who are making the disclosures and third parties who are seeking to use the information. We acknowledge that there may be alternatives to the Modified Project Definition that could potentially achieve the same objectives. The administrative record that has developed through the various rounds of rulemaking, however, reflects that the vast majority of commenters supported one of two competing definitions—

i.e.,

the contract-level definition that the Commission adopted in the disapproved 2016 Rules, and the Modified Project Definition we are adopting. Thus, given the administrative record before us, we considered the Modified Project Definition to be the principal alternative to the Contract Level Definition included in the 2016 Rules.

As a starting point, we believe that the motivating purpose of the Section 13(q) mandated disclosure of resource extraction payments is to provide transparency around the source and recipients of these payments; specifically, to identify a country's share of the resource extraction revenue generated by each project of an issuer

and the governmental level and governmental entity within the country receiving the money from each project of an issuer (hereinafter “Project-to-Government Payment Disclosure”).

Further, we believe that the principal goal of this Project-to-Government Payment Disclosure is to provide an informational tool that may help users

of the information to hold various governments accountable for how those governments spend money received. This understanding is consistent with the text of Section 13(q) and the congressional concerns leading to its adoption.

See

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

See

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

See

15 U.S.C. 78m(q)(2)(A). As discussed below, we do not find persuasive support for any conclusion that Congress intended Section 13(q) to provide material information to investors. Although some commenters have asserted that granular disclosure through a contract-level project definition might provide certain investors with useful information, we believe that other disclosures already required by the Commission operate to provide the relevant information that is material to an investment decision. Accordingly, we decline in the exercise of our discretion to provide granular information that is not required by Section 13(q) and, in our view, generally is not material to or necessary for investors. In reaching this conclusion, we recognize that Section 13(q)(2)(D)(VII) affords us discretionary authority to require resource extraction issuers to submit additional payment-related data in an interactive data format including electronic tags beyond that data identified in the statute if the Commission determines that such data could benefit investors. We have determined not to use this authority, however, because as discussed above, we do not believe the data collected under Section 13(q) is material to investors, nor have we determined that electronically tagging additional data is necessary or appropriate in the public interest or for the benefit of investors.

We believe that the Modified Project definition is reasonably tailored to achieve this goal, providing transparency to users of the information and doing so with a consistent and understandable frame of reference. Moreover, as we explain in Section II.B.1. below, we believe it is a better choice than the anonymized compilation for achieving this goal because it permits the users of the information to see, by identified issuers, the payments from specified activities in a defined area of the country to the various governmental authorities within the country.

Further, we anticipate the Modified Project Definition should provide resource extraction issuers with a practical and relatively straightforward definition of “project” that they can utilize in tracking and reporting payments wherever they may have ongoing operations around the globe. We also note that it appears that the Modified Project Definition may reduce the compliance burden of the Section 13(q) rules compared to the 2016 Rules. Specifically, the Modified Project Definition will allow an issuer to make the payment disclosure at a greater level of aggregation than under the Contract-Level Project Definition. As such, there should be fewer individual data points that have to be tracked, electronically tagged and reported, which may make it less burdensome to disclose the payment information on an ongoing basis. For similar reasons, the revised definition may also help limit any adverse competitive effects associated with project-based disclosures.

We acknowledged in the 2019 Rules Proposing Release that the Modified Project Definition, in contrast to the more granular Contract-Level Project Definition, might narrow the scope of the transparency benefits under Section 13(q). We stated that by providing transparency about the revenues generated from each contract, license, and concession, the Contract-Level Project Definition could serve to reduce further the potential for corruption in connection with the negotiation and implementation of a resource extraction contract as compared to the Modified Project Definition. As such, it could reduce instances of corruption that may occur

before

resource-extraction revenue is paid to the government.

As discussed below, however, we view this potential for incremental deterrence as a discretionary goal rather than the primary objective of Section 13(q).

See

2019 Rules Proposing Release at Section II.F.1.

Some commenters asserted that only a granular (

e.g.,

contract-level) definition of project will fully achieve the transparency and anti-corruption purposes that Congress sought to achieve with Section 13(q).

In advancing this argument, these commenters point to five considerations that the Commission identified in the 2016 Adopting Release to support the conclusion that a granular “definition of project . . . is necessary and appropriate to achieve a level of transparency that will help advance the important anti-corruption and accountability objectives of Section 13(q).” Specifically, these commenters noted, the 2016 Adopting Release stated that a granular definition would: (1) Help reduce instances where government officials are depriving subnational and local communities of revenue allocations to which they are entitled; (2) potentially permit “comparisons of revenue flows among different projects” to identify “payment discrepancies that [may] reflect potential corruption and other financial discounts”; (3) help citizens and others ensure that firms are meeting their payment obligations; (4) help local communities and civil society groups possibly weigh the costs and benefits of a project; and (5) possibly deter companies from underpaying royalties or other monies owed.

See, e.g.,

letters from PWYP-US (Mar. 16, 2020); and Oxfam America and Earthrights International.

See

2016 Rules Adopting Release at Section II.E.3.

As a threshold matter, we observe that any effort to achieve the foregoing objectives would appear to depend on other factors beyond the scope of Section 13(q) and the Commission's rulemaking authority.

For example, item (1) assumes that there are statutory obligations for the national government to provide revenue allocations to other governmental levels within a country. In any event, as explained below, to the extent that a country has enacted a revenue-sharing law, we believe that the Modified Project Definition will provide significant information about payments to the national government that would help determine whether that government has met its statutory revenue-sharing obligations. Additionally, items (2) and (3) would appear to require

at a minimum

the disclosure of the underlying contracts, licenses, or leases to determine whether the payment obligations are similar among them; without that information, there would be no obvious way to make cross-project comparisons or ensure that resource extraction issuers are meeting their payment obligations. And with respect to items (4) and (5), without public awareness of the payment obligations (as well as the gross revenues earned annually by the project), it would appear doubtful that there could be any reasonably complete (or accurate) cost-benefit determination of the project or any form of oversight resulting in meaningful deterrence.

This stands in contrast to what we believe is the primary congressional concern underlying Section 13(q), which (as we discuss below) can be fully addressed within available authority, and it is a factor in leading us to believe that these five potential collateral uses for the payment disclosures are neither statutorily compelled nor necessary to the transparency goals that Congress intended to advance.

Based on the foregoing, as well as our consideration of the text of Section 13(q) and the history leading to its adoption in 2010, we do not find any persuasive support for the 2016 Adopting Release's conclusion that Section 13(q) requires payment disclosures that could advance the five purposes enumerated in that release. Thus, even assuming that the granular disclosure required by the 2016 Rules

might

facilitate in some fashion one or more of those goals, this result is not compelled, either directly or indirectly, by Section 13(q); and to the extent that the 2016 Adopting Release suggests otherwise, we disavow that determination.

Instead, those goals are

better understood as (at most) secondary or ancillary objectives that the agency in its discretion sought to further by requiring granular payment disclosure through the project definition. Consistent with that interpretation, we decline to exercise our discretion to follow the 2016 approach by utilizing a project definition that is focused on furthering these secondary objectives of the payment information.

In this regard, we find it telling that Congress did not provide a definition of project or even direct

us to define the term. Nor, when Section 13(q) was enacted, was there a definition of project under EITI or any foreign transparency regimes (as none then existed). The Commission chose to define the term project in the exercise of its discretionary authority. This indicates that the Commission could have declined to adopt a uniform definition of project, let alone a granular definition, and instead allowed resource extraction issuers the ability to define the contours of their projects on a case-by-case basis. Accordingly, we do not read Section 13(q) as necessarily requiring the Commission to adopt granular disclosure through a definition of the term project.

We now turn to explain various aspects of the final rules. First, the final rules include changes from the proposal that we believe will help limit the potential loss of payment information compared to a contract-based definition. Specifically, the rules that we adopt in this release will include the reinstatement of the $100,000 threshold in the definition of a “not de minimis” payment

as well as a requirement to disclose the amounts paid to, and to identify, each subnational government payee.

See infra

Section II.C.

See infra

Section II.G.

Second, issuers will be required to disclose payments at the major subnational government level. As such, users of this information would be able to see the payments made directly to a province or state, and could use this data to assess a province's or state's use of the funds received, such as whether the province is employing the funds to benefit its citizens.

100

Although not a goal of Section 13(q) (

see

the discussion above concerning the ultimate goal of the Project-to-Government Payment Disclosure of Section 13(q)), the final rules may provide information that would be useful for determining whether national governments in countries that have revenue-sharing laws have allocated funds to provinces or other subnational governments if and as required by law. For example, users of the information would be able to see all the reported payments made by resource extraction issuers from their projects that are paid to a particular national government in a particular year. They could then apply the relevant percentage under the country's revenue-sharing law to the aggregated amount of payments from all issuers to determine the portion of funds that should be allocated to a given province or other subnational government. Such persons could then use that data to hold the national government accountable for what they believe to be the lawful allocation of revenues required to be paid to a given subnational government from the extractive operations in that country. Similarly, the final rules will identify the specific government payees, which will help users of the information assess whether the payees allocated any funds to the specific communities where project activities are being conducted. The usefulness, however, of the Section 13(q) payment data for purposes of determining the lawful allocation from the national government to a subnational government will depend on the complexity of the particular revenue-sharing law. For allocations under complex revenue-sharing laws, which rely on factors other than a percentage-based formula,

see, e.g.,

letter from Iraqi Transparency Alliance, it is likely that neither a contract-based project definition nor the Modified Project Definition would be useful for this purpose.

We also note that there is no single generally accepted definition of project in the mining industry and the definitions that exist are typically very broad and do not define project based on an individual contract level.

101

The definitions of project in the oil and gas industry (and related definitions in the Commission's oil and gas disclosure requirements) similarly do not focus on contractual arrangements that generate payment obligations but rather on whether operations will result in the development and production of reserves.

102

In light of this, we believe the Modified Project Definition, based on the resource (and how and where it is extracted, as well as the company's identity) is a reasonable approach.

101

For example, the Canadian disclosure regime for companies with mining operations defines a mineral project as “any exploration, development or production activity” regarding “base and precious metals, coal, and industrial minerals.”

See

National Instrument (NI) 43-101, Part 1.1 (2016).

102

See, e.g.,

Society of Petroleum Engineers,

Petroleum Resources Management System,

Section 1.2 (June 2018) (stating that a project may, for example, “constitute the development of a well, a single reservoir, or a small field; an incremental development in a producing field; or the integrated development of a field or several fields together with the associated processing facilities (

e.g.,

compression.”);

see also

17 CFR 210.4-10(a)(8) (Rule 4-10(a)(8) of Regulation S-X), which defines a “development project” as “the means by which petroleum resources are brought to the status of economically producible” and provides as examples “the development of a single reservoir or field, an incremental development in a producing field, or the integrated development of a group of several fields and associated facilities with a common ownership.”

Some commenters opposed the Modified Project Definition because it deviates from the contract-based definition of project adopted under the EU Directives, Canada's ESTMA, and, most recently, the EITI, which they describe as the international norm for a project definition in payments-to-governments reporting.

103

They maintain that the Modified Project Definition would (1) produce differences in the granularity of the payment disclosure reported under the Section 13(q) rules and that reported under the EU Directives, Canada's ESTMA, UK's and Norway's transparency regimes, and the voluntary reporting program of the EITI, and (2) result in issuers with multi-jurisdictional operations collecting and reporting two different sets of payment data to accommodate the different project definitions, thereby unnecessarily increasing compliance costs and potentially confusing users of the payment data.

104

Commenters therefore recommended adoption of a contract-based definition to maintain a level playing field among industry competitors

105

and to increase the comparability of the payment data.

103

See, e.g.,

letters from BHP; BP; Oxfam and Earthrights International; and PWYP-US (Mar. 16, 2020).

104

See

letters from BHP and PWYP-U.S. (Mar. 16, 2020).

105

See

letters from BP and Total (Feb. 10, 2020).

One commenter stated that, instead of permitting the aggregation of contracts under the Modified Project Definition, the Commission should adopt the approach for aggregating contracts used in the foreign reporting regimes, which permits agreements with substantially similar terms that are both operationally and geographically integrated to be treated by the issuer as a single project. According to this commenter, the recommended approach would constitute a change from the 2016 Rules that better aligns with international practice.

106

See

letter from Oxfam America and Earthrights International.

We acknowledge that adoption of the Modified Project Definition may in many instances produce differences in the granularity of the payment disclosure reported under the Section 13(q) rules and that reported under the EU Directives, Canada's ESTMA, UK's and Norway's transparency regimes, and the voluntary reporting program of the EITI. We are not statutorily required, however, to harmonize our disclosure obligations with other reporting regimes. We also believe that other aspects and considerations regarding the final rules should significantly diminish these concerns about differences with other payment reporting regimes.

For example, as proposed, we are adopting an alternative reporting provision that will allow issuers to meet the requirements of the Section 13(q) rules by providing disclosures that comply with a foreign jurisdiction's reporting regime if the Commission has determined that the foreign reporting regime requires disclosure that satisfies the transparency objectives of Section 13(q).

107

Concurrent with adoption of these final rules, we are issuing an order recognizing that the resource extraction

payment disclosure requirements of the European Union, United Kingdom, Norway,

108

and Canada satisfy the transparency objectives of the Section 13(q) rules. Consequently, a resource extraction issuer will be able to submit a report complying with the reporting requirements of either the EU Accounting Directive or the EU Transparency Directive, in each case as implemented in an EU or European Economic Area (EEA) member country, the UK Reports on Payments to Governments Regulations, Norway's Regulations on Country-by-Country Reporting, and Canada's ESTMA, to satisfy its disclosure obligations under the Section 13(q) rules.

107

See infra

Section II.N. Issuers will have to meet certain conditions in order to avail themselves of the alternative reporting provision.

108

Norway is a member of the EEA, not the EU. While the EU Directives apply to EEA members, Norway adopted its Regulations on Country-by-Country Reporting in 2013 prior to the adoption of the EU Directives.

See

FOR-2013-12-20-1682, which is available at

https://lovdata.no/dokument/SF/forskrift/2013-12-20-1682.

A resource extraction issuer that avails itself of the alternative reporting provision will only have one set of data to collect and report—that pertaining to the alternative reporting regime—and will largely not incur costs related to the need to collect and report two different sets of payment data in order to comply with our Section 13(q) rules.

109

See infra

Section III.D.5.

In addition, to the extent that some issuers only file under the Section 13(q) rules, we understand that the Modified Project Definition could produce differences in the granularity of the payment disclosure reported under the Section 13(q) rules and other regimes. While the extent of such differences will vary depending upon the particular issuer and the location of its resource extraction operations, given that the other reporting regimes permit some aggregation of payments for multiple agreements that are substantially interconnected operationally and geographically,

110

in some instances the differences in granularity could be small. In this regard, although one commenter recommended that we adopt the foreign reporting regimes' approach to the aggregation of payments for related contracts as a change to the 2016 Rules,

111

such an approach would not constitute a change from the 2016 Rules. The 2016 Rules included a largely similar provision that allowed agreements that are both operationally and geographically interconnected to be treated by the resource extraction issuer as a single project.

112

110

See, e.g.,

EU Accounting Directive, Art. 41(4). We discussed the non-U.S. payments-to-governments reporting regimes in some detail in the 2016 Rules Adopting Release at Section I.C.

111

See

letter from Oxfam America and Earthrights International.

112

See

2016 Rules Adopting Release at Section II.E.

Similarly, the deviation from the standards adopted in other regimes could result in a lower compliance burden for resource extraction issuers subject solely to the Section 13(q) rules. Unlike resource extraction issuers who are also subject to the EU Directives (or one of the other foreign reporting regimes), issuers subject solely to the Section 13(q) rules will only have to track and disclose payments at the more aggregated level required by the Modified Project Definition.

113

This differential in burden, however, is not due to our rules' selectively imposing substantively different requirements. Rather, it is due to the fact that some issuers are also obligated to comply with the EU Directives (or another foreign reporting regime).

113

See

letter from Total (Feb. 10, 2020).

Some commenters maintained that a contract-based definition of project is superior to the Modified Project Definition because the latter is an artificial construct that deviates from industry practice.

114

As a threshold matter, we reiterate that there is no single generally accepted definition of project in the mining industry. In addition, as we discuss below in Section III.D., there is no indication that issuers that are not already subject to a foreign reporting regime have systems in place to track payments at the contract level.

115

Thus, it is likely that these issuers will incur compliance costs to implement systems to track, verify, and record payments under either a contract-based project definition or the Modified Project Definition.

116

114

See, e.g.,

letter from PWYP-US (Mar. 16, 2020).

115

See infra

Section III.D.1.

116

One industry commenter expressly noted that using the Modified Project Definition would “lower issuer compliance costs in collecting and furnishing the information.” Letter from API (Mar. 16, 2020) at 6-7.

Other commenters have argued that the Modified Project definition fails to satisfy the plain language of Section 13(q).

117

These commenters argued that the language in the statute calling for “payments made for each project” and the language calling for “the type and total amount of such payments made to each government.” when read together, indicate that Congress intended to require disaggregated reporting by project.

118

Congress, however, did not define the term “project” in Section 13(q), leaving the Commission discretion to adopt a definition that encompasses all payments as that term is defined by the Commission. Commenters did not explain how this plain language argument compels a particular definition of “project,” such as the contract-based definition.

117

See,

e.g.,

letter from Oxfam America and Earthrights International.

118

Id.

Commenters also argued that the requirement in Section 13(q) to disclose “royalties, license fees, production entitlements and bonuses” suggests that Congress intended that the Commission adopt a contract-based definition because such items are typically levied according to the terms of specific contracts and licenses.” Again, however, we do not view this language as compelling a particular “project” definition, as companies could aggregate or disaggregate these items according to the “project” definition adopted by the Commission.

Finally, some commenters opposed the Modified Project Definition because of their belief that a Contract-Level Project Definition is necessary to enable investors to assess the financial, political, and market risks regarding a particular issuer's projects.

119

As we explained in the 2019 Rules Proposing Release,

120

we do not believe that the purpose of the required disclosures is to provide material information to investors.

121

First, we believe that the Commission's existing rules should elicit all material risk-related disclosure. For example, issuers are required to disclose the most significant risks affecting an issuer or the securities being offered

122

as well as any known trends or uncertainties that have had or are reasonably likely to have a material impact on the registrant's liquidity, capital resources, or results of operations.

123

Moreover, we continue to believe that the direct incremental benefit to investors from the payment information may be limited because investors would typically require additional information to calculate cash flows and other indices of risk, which may be lacking.

124

Further, it is likely that the vast majority of the individual contract-level project payment

amounts

125

would not be material to the financial condition of the issuers that are subject to the Section 13(q) reporting requirements.

126

As such, we do not believe that such information is likely to be material to an investment decision.

127

119

See, e.g.,

letter from PWYP-US (Mar. 16, 2020); and F. Samama

et al.

120

See

2019 Rules Proposing Release at Section II.F.1.

121

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”).

122

See

17 CFR 229.503(c).

123

See

17 CFR 229.303.

124

See infra

Section III.D.1.

125

Based on publicly available data, the average payment for projects under the contract level definition was $29 million and 95% of the payments were at or below $61 million.

126

In this regard, we note that most smaller reporting companies and emerging growth companies will be exempt from the Section 13(q) reporting requirements.

127

This was acknowledged by the then Chairman of the Senate Banking Committee, Senator Christopher Dodd, one of the bill's co-sponsors. (The required payment information “appears not to rise to the level of materiality for investors that currently governs the disclosure requirements of public companies under Federal securities laws.”) 156 Cong. Rec. 3801, 3818 (May 17, 2010). In further support of our view that Section 13(q) disclosures were not intended for investor use, we observe that Section 13(q) itself makes no reference to investor interests or protection (unlike many other provisions of the securities laws) and instead states that, to the extent practicable, any rules under Section 13(q) should support the “commitment of the Federal Government to international transparency promotion efforts.” Those efforts, which involve the EITI as well as European and Canadian law, are also generally not considered to be investor disclosure measures. While we acknowledge that the placement of Section 13(q) in the Exchange Act could be understood to support a contrary congressional intention here, we think that it is more likely that the placement of the resource extraction payment disclosures in the Exchange Act is primarily because the Commission has a deep history involving issuer disclosures and Congress sought to leverage that experience. In that regard, we note that Section 1504 of the Dodd-Frank Act, which amended the Exchange Act to add Section 13(q), was not incorporated into any of the Dodd-Frank's titles that principally deal with financial regulatory matters, but rather near the end of the Act in a title labeled “Miscellaneous Provisions.”

After consideration of all of these issues, we continue to believe that adopting the Modified Project Definition is the appropriate choice to produce a rule that is not substantially the same,

128

yet one that continues to provide a level of transparency sufficient to meet Section 13(q)'s goals.

128

See infra

Section II.B., for a discussion of why we do not believe that a non-public submission followed by an anonymized compilation is the appropriate choice for complying with the CRA and meeting the overarching disclosure objectives of Section 13(q).

2. Discussion of the Modified Project Definition

In the following three subsections, we discuss the disclosure required by each of the three prongs of the Modified Project Definition in greater detail. Except for comments that either generally supported or opposed the Modified Project Definition, we received no comments directly addressing the specific prongs of the project definition. Accordingly, except as indicated, we are adopting the Modified Project Definition largely as proposed.

129

In Section II.P, the Commission explains its preference for how the final rule under Section 13(q) should be applied if the definition of “project” should be held invalid by a Federal court or otherwise deemed ineffective for any reason. If this should occur, it is the Commission's preference that the final rule should be enforced and resource extraction issuers should disclose resource extraction payments to the fullest extent practicable, including the per-project payment disclosures as required by Section 13(q)(2)(A(i). Further, issuers should determine based on their own business structure and other relevant considerations how to identify and describe their various projects until such time as the Commission completes any further rulemaking that seeks to define the term. In reaching this recommendation, we note that Section 13(q) does not define project nor does it compel the Commission to do so. Accordingly, we believe that it is appropriate to allow issuers to identify their projects in a reasonable manner just as they would be permitted to do by the statute in the absence of the Commission's exercise of discretion to adopt a definition. In specifying the preference above, the Commission is mindful that Congress enacted Section 13(q) over a decade ago and that to date no disclosures have been made under that provision. Finally, issuers are reminded that the anti-evasion provision in the final rule would continue to apply to their payment disclosures in these circumstances.

a. Type of Resource

Under the Modified Project Definition, the first prong for determining the parameters of a project is the type of resource that is being commercially developed. A resource extraction issuer will be required to disclose whether the project relates to the commercial development of oil, natural gas, or a specified type of mineral. As we explained in the 2019 Rules Proposing Release, this prong will not require an issuer to describe the specific type or quality of oil or natural gas or distinguish between subcategories of the same mineral type.

130

For example, an issuer disclosing payments relating to an oil project will not be required to describe whether it is extracting light or heavy crude oil. Similarly, an issuer disclosing payments relating to a mining project will be required to disclose whether the mineral is gold, copper, coal, sand, gravel, or some other generic mineral class, but not whether it is, for example, bituminous coal or anthracite coal.

131

130

See

2019 Rules Proposing Release at Section II.F.2.

131

For clarity and consistency, we are adopting an instruction to Form SD, as proposed, that will require synthetic oil or gas obtained through the processing of coal to be classified as “coal.”

See

Instruction 5 to Item 2.01 of Form SD.

We continue to believe that a requirement to provide greater detail regarding the type of resource that is the subject of extractive activities is not necessary for persons to determine whether those activities have given rise to government payments in which they may have an interest. The presence of the activities combined with the disclosure of the method of extraction (well, open pit, etc.) and the identification of the resource as oil, gas or,

e.g.,

gold, copper, or coal, will provide transparency to the users of the information to assess whether and to what extent there are payments being made for extraction activities in a particular area. We believe that requiring greater detail about the type of resource could reveal proprietary information that could cause competitive harm, a concern that members of Congress expressed when disapproving the 2016 Rules. Such an approach could make the final rules less likely to satisfy the CRA's restriction on reissuing the disapproved rule in substantially the same form or adopting a new rule that is substantially the same.

b. Method of Extraction

The second prong for determining the parameters of a project is the method of extraction. This prong will require a resource extraction issuer to identify whether the resource is being extracted through the use of a well, an open pit, or underground mining. Additional detail about the method of extraction will not be required. For example, a resource extraction issuer would not be required to disclose whether it is using horizontal or vertical drilling, hydraulic fracturing, or strip, sublevel stope, or block cave mining. Similar to the type of resource prong, we believe that such a level of specificity regarding the particular method of extraction would not provide any additional meaningful information to end users, and that the required disclosure about method of extraction will provide transparency to users of the information to assess whether and to what extent there are payments being made for extraction activities in a particular area. On the other hand, such disclosure could result in the disclosure of proprietary information, which could potentially result in competitive harm and thus make it less likely that the final rules satisfy the CRA requirements.

c. Major Subnational Political Jurisdiction

The third prong for determining the parameters of a project is the major subnational political jurisdiction where the commercial development of the resource is taking place. This prong will require an issuer to disclose only to the level of major subnational jurisdiction (

e.g.,

state, province, district, region, territory) in which the resource

extraction activities are occurring. As discussed below, we are also adopting the proposed requirement that an issuer must provide an electronic tag for both the country and the major subnational political jurisdiction in which the extractive activities are occurring that is consistent with the International Organization for Standardization (“ISO”) code pertaining to countries and their major subdivisions.

132

We believe that the required use of ISO codes to identify major subnational jurisdictions will provide a standardized data format that may be more easily analyzed than the data produced under the Contract-Level Project Definition.

132

See infra

Section II.M. In a change from the proposed rules, in response to commenters' concerns that the proposed treatment of payments to subnational governments (below the level of major subnational political jurisdiction) was not sufficiently transparent, issuers will also be required to provide an electronic tag identifying each subnational government payee rather than referring to such payees generically (

i.e.,

as “county” or “municipality”).

See infra

Section II.G.

For example, a project for extractive activities in the city of Timika in the province of Papua, Indonesia would be identified as occurring in Papua, without identifying Timika, as Papua would be the major subnational political jurisdiction. Similarly, an issuer would identify the project for activities in the counties of Elko, Nevada and White Pine, Nevada, as occurring in Nevada because Nevada would be the major subnational political jurisdiction.

If the extractive activity is offshore, we proposed requiring an issuer to include in its project identification that its operations are offshore as well as the nearest major subnational political jurisdiction. One commenter stated that labeling projects in national waters according to the nearest major subnational political jurisdiction could create an incorrect impression that the identified subnational jurisdiction has a greater practical or legal relationship to the project than other subnational jurisdictions in the area, which may well not be the case. This could in turn create “undesirable or wasteful political dynamics between states or provinces in the host country.”

133

For offshore resource extraction, that commenter recommended identifying the project by the body of water in which the project is located (

e.g.,

Gulf of Mexico) instead of the nearest major subnational jurisdiction.

134

133

Letter from API (Mar. 16, 2020).

134

See id.

We agree with this commenter that in certain circumstances labeling an offshore project by the nearest major subnational jurisdiction could be confusing, for example, a particular offshore project may be equidistant from multiple coastal states or provinces. Accordingly, we have revised the proposed third prong of the Modified Project Definition to provide that, for offshore projects, the identification of the major subnational political jurisdiction where the commercial development of the resource is taking place should include the body of water in which the project is located, using the smallest body of water applicable (

e.g.,

gulf, bay, sea), as well as the nearest major subnational jurisdiction. In addition, if the project is equidistant from two major subnational jurisdictions, the issuer may disclose both such jurisdictions.

135

See Instruction (5)(iii) to Item 2.01 of Form SD.

d. Special Situation

Under the final rules, commercial development activities using multiple resource types or extraction methods can be treated as a single project if such activities are located in the same major subnational political jurisdiction.

136

The issuer will be required to describe each type of resource that is being commercially developed and each method of extraction used for that project. For example, an open pit and underground zinc mining project in Erongo, Namibia would be described as “ER/Zinc/Open Pit/Underground” and a drilling project off the shore of Veracruz, Mexico that produced both oil and natural gas would be described as “Offshore-Gulf of Mexico/Veracruz/Oil/Natural Gas/Well.”

136

See Instruction (5)(iv) to Item 2.01 of Form SD.

We recognize that such an approach could result in broad aggregation of projects within a major subnational political jurisdiction, which could make it more difficult for end-users of the disclosure to identify the specific commercial development activities associated with the disclosed payments. Nevertheless, as we explained in the Proposing Release, we believe that this approach is appropriate because issuers often develop more than one type of resource at a particular location and use more than one method of extraction. Limiting the definition of project to only commercial development activities comprising the same type of resource, method of extraction, and major subnational political jurisdiction may result in artificial distinctions. For example, an issuer would be required to treat oil and natural gas extraction from the same well as separate projects, and similarly, open pit and underground mining in the same location as separate projects. Requiring that these types of related activities be treated as separate projects could also lead to confusion about how reportable payments should be allocated between such projects. Although we solicited comment on the proposed approach to development activities using multiple resource types or extraction methods, no commenters specifically objected or suggested alternative approaches.

In some situations, the site where a resource is being commercially developed could cross the borders between, and generate payment obligations in, multiple major subnational political jurisdictions. In such a case, the final rules will require the issuer to treat the activities in each major subnational political jurisdiction as separate projects, as proposed.

137

This approach reflects the fact that, although the cross-border extractive activities are related, the disaggregated payment information would be of interest to different users of the information.

137

See

Instruction (5)(iv) to Item 2.01 of Form SD.

B. Public Reporting

1. Public Disclosure of the Issuer's Payment Information, Including the Issuer's Name

Section 13(q) provides the Commission with the discretion to require public disclosure of payments by resource extraction issuers, including their names, or to permit nonpublic filings.

138

When proposing the 2019 Rules, the Commission expressed its belief that exercising its discretion to require public disclosure, including the issuer's name, might better accomplish the objectives of Section 13(q).

139

The Commission stated, however, in the 2019 Rules Proposing Release that it would also consider an alternative approach supported by some commenters on the 2016 Rules that would permit issuers to submit their Section 13(q) reports to the Commission non-publicly and have the Commission use those nonpublic submissions to produce an aggregated, anonymized compilation that would be made available to the public.

140

After reviewing the numerous comments received on the public reporting issue,

we are adopting the proposed requirement that resource extraction issuers provide the Section 13(q) disclosure publicly, including their names, through the searchable, online EDGAR system.

141

138

See

API v. SEC, 953 F. Supp. 2d at 11 (finding that the Commission “misread the statute to mandate public disclosure of the reports” when adopting the 2012 Rules).

139

See

2019 Rules Proposing Release at Section II.I.1;

see also

2016 Rules Adopting Release at II.H.3.

140

See

2019 Rules Proposing Release at Section II.I.1 (citing letters from API (Feb. 16, 2016) and (Jan. 28, 2011); BP (Feb. 16, 2016); Chevron (Feb. 16, 2016); and Royal Dutch Shell (Feb. 5, 2016));

see also

2016 Rules Proposing Release, Section II.G.2 and 2016 Adopting Release, n.345.

141

As we did in the 2012 and 2016 rulemakings, we are requiring that a resource extraction issuer provide the required Section 13(q) disclosures on Form SD (17 CFR 249b.400).

Many commenters supported the proposed public submission of the Section 13(q) reports and expressly opposed the alternative, non-public submission and anonymized compilation approach.

142

Commenters indicated that public reporting of issuer-specific payment information is essential to carry out Section 13(q)'s transparency, accountability, and anti-corruption objectives.

143

Commenters stated that, to achieve these objectives, public reporting is necessary to hold both government actors and commercial actors accountable in resource-rich countries so as to achieve meaningful oversight of government revenue collection and management and deter corruption.

144

Commenters maintained that, in contrast, the non-public submission and anonymized compilation approach would not be conducive to building trust between issuers, governments, and local citizens, would not prevent mismanagement of funds obtained from resource payments, and would negate the transparency and anti-corruption benefits for citizens that Section 13(q) was intended to achieve.

145

Some commenters also noted that the non-public submission and anonymized compilation approach would nullify Section 13(q)'s benefits to investors by preventing them from obtaining issuer-specific payment data to help them assess risk in investing in resource extraction issuers.

146

Finally, commenters stated that adoption of the non-public submission and anonymized compilation approach would result in a decrease in comparability with the non-U.S. payments-to-governments reporting regimes, each of which requires public, issuer-specific reporting of payments.

147

142

See, e.g.,

letters from Congr. Waters

et al;

Equinor; Oxfam and Earthrights International; Project On Government Oversight (Mar. 13, 2020) (POGO); PWYP-US; Sens. Cardin

et al.;

and Transparencia por Colombia (Mar. 19, 2020).

143

See, e.g.,

letters from Oxfam America and Earthrights International; PWYP-US (Mar. 16, 2020); and Sens. Cardin

et al.

144

See, e.g.,

letters from Oxfam American and Earthrights International; and PWYP-US (Mar. 16, 2020);

see also

letter from POGO.

145

See

letters from Equinor; Oxfam American and Earthrights International; and Congr. Waters

et al.

146

See

letters from Congr. Waters

et al;

Oxfam American and Earthrights International; and PWYP-US (Mar. 16, 2020).

147

See, e.g.,

letters from Oxfam American and Earthrights International; and PWYP-US (Mar. 16, 2020).

A few commenters supported the non-public submission and anonymized compilation approach.

148

One commenter stated that Congress's goal of enabling people to hold their governments accountable for the revenues generated from resource development would be achieved as long as citizens know the amount of money the government receives, and not the companies that make each individual payment.

149

This commenter further expressed its concern that public disclosure of issuer-specific extractive payments may result in harm by allowing competitors to reverse-engineer the value a particular issuer places on a specific resource area. Moreover, the commenter stated that the threat of reverse-engineering could occur even under the proposed Modified Project Definition by allowing a competitor to compare changes in reported payments for the same area year after year, which could provide competitive insights especially where a particular country effectively possesses a single major area of resource development.

150

For those reasons, this commenter believed that the non-public submission and anonymized compilation approach would best balance the goals of achieving the objectives of Section 13(q) and preventing unnecessary harm to resource extraction issuers.

148

See

letters from API (Mar. 16, 2020); Chamber; and NAM.

149

See

letter from API (Mar. 16, 2020).

150

See id.

We acknowledge the concerns raised about potential competitive harm, but do not believe that adoption of the non-public submission and anonymized compilation is necessary to avoid any such potential competitive harm. Rather, as discussed above, we believe that adopting the Modified Project Definition, under which issuers will not be required to disclose overly descriptive disclosures potentially revealing competitively sensitive information, is sufficient to address any such risks.

Moreover, we do not believe that adoption of the non-public submission and anonymized compilation would achieve the same level of transparency as our approach in the final rules. We acknowledge that the anonymized compilation would reveal the payments to foreign governments at all levels, including the specific agency and department within the government. As such, it would provide some level of transparency in foreign nations that currently do not disclose such information, or do not do so accurately. Importantly, however, the reduced transparency provided by an anonymized compilation would significantly limit the usefulness of the disclosure because all similar activities in the same subnational jurisdiction, regardless of issuer, would be indistinguishable. Thus, we believe that this would be much less effective in achieving Section 13(q)'s transparency goals as compared to our approach.

In this regard, we note that if Congress had simply been focused on the disclosure of revenues into foreign governments, it would have been sufficient to require only the disclosure of payments to foreign governments required by Section 13(q)(2)(A)(ii), which requires information about the payments to each government. Yet Congress also included Section 13(q)(2)(A)(i), which mandates that the Commission's rules must require the disclosure of the type and total amount of such payments made “for each project of the resource extraction issuer.” Thus, we believe that the Modified Project Definition, which provides for public disclosure of the issuer, is the more effective choice for satisfying the CRA mandate and achieving the transparency goals of Section 13(q).

We also do not believe that it is necessary to adopt the non-public submission and anonymized compilation approach to fulfill the CRA's mandate that the new rule not be substantially the same as the disapproved rule. Rather, as discussed above, we believe that adoption of the Modified Project Definition will largely accomplish this objective. We also believe that the other changes to the 2016 Rules that we are adopting will further distinguish the final rules from the disapproved rules and, in addition, help address concerns about the rules' burdens. In addition to the Modified Project Definition,

151

these changes include the rule-based exemptions for conflicts with foreign law and pre-existing contracts;

152

the exemptions for smaller reporting companies and emerging growth companies;

153

transitional relief for a resource extraction issuer that has completed its initial public offering in its last full fiscal year;

154

and an extended

submission deadline.

155

Adoption of the proposed delayed reporting for exploratory activities, which we first adopted in 2016, should also help to mitigate the potential for competitive harm.

156

151

See supra

Section II.A.

152

See infra

Sections II.D.1. and 2.

153

See infra

Section II.D.3.

154

See infra

Section II.D.6

155

See infra

Section II.L.2.

156

See infra

Section II.D.4.

Moreover, like the 2016 Rules, the final rules will include contractually required social and community payments among the required disclosures,

157

and issuers will be required to disclose those payments made to subnational governments while identifying each subnational government payee.

158

As such, the users of the information may be able to assess whether the local communities are in fact receiving the promised payments and whether those payments are being used by the governments for their intended purpose.

159

157

See infra

Section II.J.5.

158

See infra

Section II.G.

159

Social or community payments are frequently made as accommodations by resource extraction issuers to local communities impacted by extractive activities. For example, when filing its Exchange Act annual report, a mining registrant is required to attach a technical report summary prepared by its mining expert (its “qualified person”), which must include a description of “accommodations the registrant commits or plans to provide to local individuals or groups in connection with its mine plans.”

See

17 CFR 229.601(b)(96)(iii)(B)(

)[Item 601(b)(96)(iii)(B)(

) of Regulation S-K.

Finally, although not a primary goal of Section 13(q), we note that adoption of the requirement for issuer-specific, public disclosure may nevertheless help to further Section 13(q)'s directive to support the commitment of the Federal Government to international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals.

160

As commenters noted, all other existing reporting regimes require public disclosure of the payment information, including the identity of the issuer.

161

Adoption of a similar requirement under Section 13(q) would be consistent with the statutory directive to support the commitment of the Federal Government to international transparency efforts by increasing the total number of companies that provide public, issuer-specific disclosure.

160

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

161

See supra

note 147.

see also

letter from Kaufmann.

One commenter opposing the proposed “not de minimis” payment definition stated that the proposed $750,000 threshold would operate as a de facto “materiality” requirement for the definition of project, which the commenter argued has no support in the statutory language.

178

Several commenters contended that both the $750,000 and $150,000 thresholds appear to be arbitrary and unsupported by anything in the record.

179

Some commenters also stated that the proposed definition is inconsistent with the payment threshold adopted in over 30 countries under the laws of the other payments-to-governments reporting regimes, each of which approximates $100,000.

180

Other commenters maintained that the proposed “not de minimis” payment definition would lessen the comparability of the payment data for users interested in analyzing the data on a global basis

181

and could result in a competitive disadvantage to companies operating and reporting in the other non-U.S. jurisdictions.

182

Finally, some commenters believed that the proposed “not de minimis” payment definition could encourage corruption, or at least be inconsistent with the anti-corruption objective of Section 13(q), by facilitating the manipulation of payments to below one or both thresholds and thereby keeping them non-reportable.

183

For the above reasons, many commenters requested that, consistent with the 2016 Rules, we define “not de minimis” as a payment that equals or exceeds $100,000, whether made as a single payment or series of related payments.

184

178

See

letter from PWYP-US (Mar. 16, 2020).

179

See id.; see also

letters from Elise J. Bean; Oxfam America and Earthrights International; Eric Postel; Sierra Club; and Congr. Waters

et al.

180

See

letters from Elise J. Bean; Oxfam America and Earthrights International; and PWYP-US (Mar. 16, 2020).

181

See, e.g.,

letters from Sens. Cardin

et al.;

FACT Coalition; and F. Samama

et al.

182

See

letter from Total (stating that, together with the proposed project definition, the different “not de minimis” threshold may result in a competitive disadvantage detrimental to EU issuers).

183

See, e.g.,

letters from Better Markets; Oxfam America and Earthrights International; and Public Citizen.

184

See supra

note 174.

We believe that these commenters have raised a number of valid concerns, the most significant of which is that the proposed definition could result in a high percentage of projects going unreported, thereby unduly reducing transparency. We also believe that adopting the $100,000 threshold will mitigate against the potential loss of information that may arise as a result of our adoption of the Modified Project Definition, which, as we have discussed, we believe is the most appropriate way to comply with the CRA.

Under the adopted definition, a “not de minimis” payment means any payment, whether made as a single payment or a series of related payments, that equals or exceeds $100,000, or its equivalent in the resource extraction issuer's reporting currency.

185

We are adopting the remainder of the proposed definition, which provides that, in the case of any arrangement providing for periodic payments or installments, a resource extraction issuer must use the aggregate amount of the related periodic payments or installments of the related payments in determining whether the payment threshold has been met for that series of payments, and accordingly, whether disclosure is required. We did not receive any comments on this part of the definition, which is similar to the definition adopted under the 2016 Rules.

185

See

Item 2.01(d)(8) of Form SD.

We are also adopting the proposed instruction that allows an issuer to choose several methods to calculate currency conversions for payments not made in U.S. dollars or the issuer's reporting currency. That instruction also provides that the same methods are available to issuers when calculating whether a payment not made in U.S. dollars meets or exceeds the “not de minimis” threshold.

186

We did not receive any comments on this instruction. We continue to believe that providing alternative methods for calculating currency conversions would help limit compliance costs under Section 13(q). As under 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.

187

186

See

Instruction 2 to Item 2.01 of Form SD.

187

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”).

D. Exemptions From Compliance

The 2013 District Court opinion found that the Commission has the authority to grant exemptions with respect to Section 13(q).

188

We proposed three new exemptions from reporting under Section 13(q),

189

as follows:

188

See API

SEC

, 953 F. Supp. 2d at 21-23.

189

See

2019 Rules Proposing Release at Section II.J.

• If the Section 13(q) disclosure is prohibited by foreign law;

• If the required disclosure would violate one or more pre-existing contract terms; and

• If the resource extraction issuer is a smaller reporting company

190

or an emerging growth company.

191

190

The Commission recently amended the definition of “smaller reporting company” to expand the number of registrants that qualify as smaller reporting companies, and to reduce compliance costs for these registrants and promote capital formation, while maintaining appropriate investor protections. The amended definition of “smaller reporting company” includes registrants with a public float of less than $250 million (compared to $75 million in the earlier rule), as well as registrants with annual revenues of less than $100 million for the previous year and either no public float or a public float of less than $700 million.

See

Release No. 33-10513 (Jun. 28, 2018) [83 FR 31992 (Jul. 10, 2018)].

191

The term “emerging growth company” means an issuer that had total annual gross revenues of less than $1,070,000,000 during its most recently completed fiscal year.

See

the definition of emerging growth company in Securities Act Rule 405 and Exchange Act Rule 12b-2.

We also proposed delayed reporting for exploratory activities and transitional relief for recently acquired companies, both of which were included in the 2016 Rules.

192

In addition, we proposed similar transitional relief for a resource extraction issuer that has recently conducted its initial public offering.

193

Finally, we proposed to retain the 2016 Rules' provision allowing an issuer to file an application for exemptive relief on a case-by-case basis.

194

192

See

2016 Adopting Release, Section II.G.3.

193

See

2019 Rules Proposing Release at Section II.J.6.

194

See

2019 Rules Proposing Release at Section II.J.7.

When proposing the exemptions for situations involving conflicts with foreign laws or pre-existing contract terms, we noted that several industry commenters had specifically recommended these two exemptions in connection with prior rulemakings to reduce the risk of competitive harm that

could result from the required Section 13(q) payment disclosure. According to these commenters, without these exemptions, a resource extraction issuer that faced a legal or contractual conflict would have to choose between complying with Section 13(q) or the host country law or contract.

195

We believe that these exemptions and the proposed transitional relief would address the previously expressed concerns about the burdens and potential risks of Section 13(q) disclosure.

195

See

2019 Rules Proposing Release at Section II.J. (citing letters from API (Feb. 16, 2016) and (Nov. 7, 2013); Chevron (Feb. 16, 2016); ExxonMobil (Feb. 16, 2016); and Nouveau (Feb. 16, 2016)).

We also believe that the proposed exemptions are consistent with the CRA's prohibition on adopting rules that are in substantially the same form as the disapproved rules. Accordingly, we are adopting these provisions largely as proposed, except that we have added a condition to the exemption for emerging growth companies and smaller reporting companies to address specific concerns raised by commenters. We discuss each of these provisions in more detail below.

1. Exemption for Conflicts of Law

We are adopting, as proposed, a conditional exemption for when an issuer is unable to provide the required disclosure without violating the laws of the jurisdiction where the project is located.

196

We proposed this exemption after reconsidering comments in the 2016 rulemaking concerning the potential harm that could occur from a situation involving a conflict with foreign law.

197

Congressional members who voted to disapprove the 2016 Rules also expressed concern about the lack of exemptions under the 2016 Rules.

198

196

See

17 CFR 240.13q-1(d)(1).

197

See, e.g.,

2019 Rules Proposing Release at Section II.J.;

see also

letters from API (Feb. 16, 2016); and ExxonMobil (Feb. 16, 2016). (Indicating that if an issuer chose to provide the payment disclosure in violation of the host country law, the issuer could face the shut down and, in the extreme case, expropriation of its facilities in the host country, the imposition of fines, or the withholding of permits.)

198

See, e.g.,

163 Cong. Rec. H. 848, 853 (February 1, 2017) (Statement of Rep. Rothfus) (“I am also concerned that this rule could force companies to withdraw from certain countries. Among other things, some foreign countries have laws to prohibit the sort of disclosures called for in this rule. Since the rule provides no exemptions, American firms may be forced to abandon business ventures that provide jobs and opportunities for Americans.”);

see also

letter from Sen. Corker

et al.

Several commenters in the current rulemaking continued to express concerns about a conflict of law situation in the host country and supported an exemption to address the potential competitive harm and administrative difficulties resulting from such a situation.

199

Some industry commenters also stated their belief that a case-by-case exemptive approach for handling situations involving conflicts of law (or contract prohibitions) is problematic. These commenters stated that the substantial practical and administrative difficulties associated with obtaining timely exemptive relief, particularly for an issuer threatened with the potential total loss of its operations in the host country, render this option unworkable.

200

199

See

letters from API (Mar. 16, 2020); Chamber; Davis Polk & Wardwell (Mar. 6, 2020) (Davis Polk); NAM; Petrobras (Mar. 16, 2020); and SAF.

200

See

letters from API (Mar. 16, 2020); NAM; and SAF. Some commenters articulated this concern about a case-by-case exemptive approach for handling conflict of laws situations in the 2016 rulemaking.

See

letters from API (Feb. 16, 2016); and ExxonMobil (Feb. 16, 2016).

Other commenters objected to any exemption to the Section 13(q) rules, including one for conflicts of law situations.

201

These objections were largely based on (1) the absence of exemptions under the EU and Canadian transparency regimes and the comparative gap in coverage that would occur;

202

(2) a concern that the Section 13(q) exemptions, particularly the conflicts of law exemption, could create an incentive for countries to enact similar provisions that would undermine international transparency promotion efforts;

203

and (3) the lack of demonstrated need for the exemptions, which some commenters viewed as overly broad.

204

201

See, e.g.,

letters from Africa Center for Energy Policy; Elise J. Bean; Sens. Cardin

et al.;

DAR; EG Justice (Mar. 11, 2020); FACT Coalition; Friends of the Nation (Mar. 16, 2020); Shannon Gough; KCSPOG; Eric Postel; Robert Rutkowski (Mar. 16, 2020); Transparency International (U.S.) (Mar. 13, 2020); and Congr. Waters

et al.

202

See, e.g.,

letters from Elise J. Bean; and Congr. Waters

et al.

In this regard, we acknowledge that the conflicts of law exemption may lessen comparability with the EU and Canadian transparency regimes to a certain extent.

203

See, e.g.,

letters from Elise J. Bean; FACT Coalition; and Robert Rutkowski.

204

See, e.g.,

letters from Elise J. Bean; Eric Postel; and Congr. Waters

et al.

After considering the comments, and with a view to limiting delay and burdens, the final rules will permit issuers, as proposed, to avail themselves of the exemptions for situations involving conflicts with foreign laws (or pre-existing contract terms) without seeking individual relief on a case-by-case basis. This approach will help facilitate an issuer's timely submission of Form SD and alleviate some of the uncertainties of handling conflicts of law situations. Further, to the extent that the requirement to obtain a case-by-case exemption (and the attendant uncertainties surrounding whether such relief might be granted) could inhibit companies from bidding on or initiating resource extraction projects in particular countries or otherwise impair the ability of companies to compete effectively for such projects, we anticipate that our revised approach will substantially eliminate these potential barriers.

Although commenters differed regarding whether there is a demonstrated need for a conflicts of law exemption, in order to address concerns about the potentially significant consequences of such a conflict, on balance we think it is appropriate to provide such an exemption. One commenter has identified at least two countries—China and Qatar—that have laws that may prohibit the Section 13(q) disclosure.

205

Although publicly available information reveals that some resource extraction issuers have disclosed payments to governments in those countries,

206

the possibility remains that those countries, or others, could elect in the future to enforce or enact laws that conflict with the Section 13(q) requirements. We agree with those commenters who indicated that, to the extent that such a conflict exists, resource extraction issuers should not have to choose between complying with the Section 13(q) rules and violating host country laws.

207

205

See, e.g.,

letter from API (Mar. 16, 2020). In addition, commenters on the 2016 Rules discussed how such conflicts could ultimately force a resource extraction issuer to abandon or sell its assets in the host country.

See, e.g.,

letter from API (Feb. 16, 2016).

206

See, e.g.,

the data cited in letter from PWYP-US (Mar. 16, 2020).

207

See, e.g.,

letters from NAM; and API (Feb. 16, 2016).

We also do not believe that the conflicts of law exemption is overly broad. The mere existence of a foreign law that may prohibit the Section 13(q) disclosure will not be sufficient to justify use of the exemption. We proposed, and are now adopting, several conditions that limit the availability of the exemption. These conditions are expressly designed to help ensure that issuers forgo disclosure only when there is a legitimate conflict of law, so that the exemption does not unreasonably frustrate the statutory goal of increasing transparency regarding resource extraction payments. Specifically, an issuer seeking to rely on the exemption will be required to take certain steps to qualify for the exemption, including providing specified disclosures about its eligibility for relief. Although issuers can avail themselves of the exemption

without further Commission action, they can only do so in the prescribed manner and under the prescribed circumstances. Moreover, as is the case with all filings, the issuer's disclosure and reliance on this exemption will be subject to Commission staff review, which should discourage potentially inappropriate uses of the exemption.

To be eligible to claim the conflicts of law exemption, an issuer will first have to take reasonable steps to seek and use exemptions or other relief under the applicable law of the foreign jurisdiction.

208

After taking such steps and failing to obtain an exemption or other relief, the issuer will have to disclose the foreign jurisdiction for which it has excluded disclosure, the law preventing disclosure, its efforts to seek and use exemptions or other relief under such law, and the results of those efforts.

209

This disclosure will be required in the body of Form SD. The issuer will also be required to furnish as an exhibit to Form SD a legal opinion from counsel that opines on the inability of the issuer to provide the required disclosure without violating the foreign jurisdiction's law.

210

208

See

17 CFR 240.13q-1(d)(1)(i).

209

See

17 CFR 240.13q-1(d)(1)(ii).

210

See

17 CFR 240.13q-1(d)(1)(iii).

These conditions are similar to some of the suggested conditions recommended by some commenters. Those commenters indicated that, although they did not believe a conflicts of law exemption was necessary, they acknowledged that such an exemption would address specific concerns of some members of Congress who disapproved the 2016 Rules, would significantly contribute to the final rules' being not substantially the same as the disapproved rules, as required by the CRA, and would be a permissible change as long as accompanied by sufficient safeguards.

211

See

letters from PWYP-US (Mar. 16, 2020); and Oxfam America and Earthrights International.

Several commenters recommended that we include an additional condition that limits the exemption to foreign laws in existence before the enactment of Section 13(q) in July 2010, or at least before adoption of the final rules.

212

After considering all of the comments, we have determined not to limit the conflicts of law exemption to pre-existing foreign laws. Unlike the situation involving a conflict with pre-existing contract terms, where an issuer has control over the contract terms and would be in a position to negotiate or modify terms so that they do not conflict with the Section 13(q) requirements following adoption of the final rules, a resource extraction issuer has no control over a foreign government's enactment of laws, including those that may prohibit the Section 13(q) disclosure.

212

See

letters from PWYP-US (Mar. 16, 2020); and Oxfam America and Earthrights International.

We acknowledge that adoption of the conflicts of law exemption could incentivize a foreign government to adopt a law that prohibits the Section 13(q) disclosure. We further note that commenters on both sides of this issue indicated in support of their respective positions that no government has adopted a law or rule prohibiting the payment disclosures since the adoption of Section 13(q).

213

While this may be correct, it is not determinative of what countries may do in the future. In light of the potential harm that could result to a resource extraction issuer from a future conflicts of law situation, we are not limiting this exemption to pre-existing foreign laws.

213

Compare

letter from PWYP-US (Mar. 16, 2020)

with

letter from API (Mar. 16, 2020).

2. Exemption for Conflicts With Pre-Existing Contracts

We are adopting a conditional exemption, as proposed, from Section 13(q)'s disclosure requirements when the terms of an existing contract prohibit the disclosure.

214

The exemption will only apply to contracts in which such terms are expressly included in writing prior to the effective date of the final rules. As previously noted, we believe this limitation is justified because issuers have control over the terms of their contracts and have the ability to modify future contract terms. Similar to the exemption for conflicts of law, and for the same reasons, issuers will not need to seek the exemption on an individual, case-by-case basis. The issuer will, however, be required to meet certain conditions to qualify for relief,

215

and its disclosure and reliance on the exemption will be subject to staff review, which should help to discourage potentially inappropriate uses of the exemption. In addition, since multiple contracts may constitute a project under the Modified Project Definition, the exemption would only be available to exempt the specific payment information in the applicable contract that the issuer is expressly prohibited from disclosing by the relevant contract provision.

214

See

17 CFR 240.13q-1(d)(2).

215

Id.

Several commenters supported the proposed exemption for conflicts with pre-existing contract terms for reasons similar to those expressed in support of the exemption for conflicts of law.

216

For example, one commenter stated that the proposed exemption would allow companies to avoid being forced into a choice between complying with the new disclosure requirements and complying with agreements entered into with foreign governmental partners.

217

Other commenters indicated that the proposed exemption would minimize the harm and ease the administrative difficulties caused by conflicts with pre-existing contract terms.

218

216

See

letters from API (Mar. 16, 2020); Chamber; Davis Polk; NAM; and Petrobras.

217

See

letter from NAM.

218

See

letters from API (Mar. 16, 2020); and Chamber.

Other commenters opposed the proposed exemption for conflicts with pre-existing contract terms for reasons similar to those expressed in opposition to the exemption for conflicts with foreign law. These commenters stated that the proposed exemption was overly broad, was not needed, would reduce comparability with the non-U.S. payments-to-governments reporting regimes, which lack such an exemption, and would not further international transparency promotion efforts.

219

Other commenters that did not believe the proposed exemption for conflicts with pre-existing contracts was warranted nevertheless stated that such an exemption would be a permissible change to help make the new rule not substantially the same as the disapproved 2016 Rules as long as there are sufficient safeguards to protect against abuse.

220

219

See, e.g.,

letters from Elise J. Bean; Eric Postel; and Congr. Waters

et al.

220

See

letters from PWYP-US (Mar. 16, 2020); and Oxfam America and Earthrights International.

After reviewing all of the comments, we are adopting the proposed exemption for conflicts with pre-existing contract terms. As one commenter noted, without such an exemption, an issuer whose contract prohibits the disclosure of payment information without the host government's permission, and who fails to obtain such permission, could face adverse financial consequences.

221

The adopted exemption for conflicts with pre-existing contract terms will help to mitigate the potential burdens of the Section 13(q) rules in this regard. We also believe that the exemption is not overly broad or susceptible to misuse

because of the several conditions proposed for use of the exemption, which we are now adopting.

221

See

letter from API (Feb. 16, 2016) (stating that “many companies' contracts with host governments contain clauses requiring the government's permission before a company publicly reveals payment information” and noting that “[a]lthough some of these contracts allow an issuer to disclose payment information to comply with securities laws, many do not, particularly older contracts.”).

An issuer will first be required to take reasonable steps to seek and use any contractual exceptions or other contractual relief (

e.g.,

attempting to obtain the consent of the relevant contractual parties) to disclose the payment information.

222

This obligation to take reasonable steps would not include an obligation to renegotiate an existing contract or to compensate the other contractual parties in exchange for their consent to disclose the payments. If the issuer fails to obtain consent, the issuer will have to disclose the jurisdiction where it has excluded such disclosure, the particular contract terms preventing the issuer from providing disclosure, its efforts to seek consent or other contractual relief, and the results of those efforts.

223

224

The opinion should confirm that counsel has reviewed all of the contracts underlying or related to a project under the Modified Project Definition, that the applicable contractual provision prohibits the disclosure of the payment information that the issuer would otherwise be required to provide under Section 13(q), and that the exemption is only being applied to exempt that specific disclosure.

222

See

17 CFR 240.13q-1(d)(2)(i).

223

See

17 CFR 240.13q-1(d)(2)(ii).

224

See

17 CFR 240.13q-1(d)(2)(iii).

Some commenters recommended adding other conditions in order to prevent abuse of the exemption. For example, commenters recommended limiting the exemption to contracts that existed prior to the enactment of Section 13(q) in July 2010 in order to exclude issuers that have engaged in “10 years of gamesmanship and sub-standard contracting practice meant to avoid transparency.”

225

We do not believe such a limitation is appropriate as we are not aware of any evidence demonstrating that issuers have drafted contract terms during the last decade to preclude reporting of payments to governments in this context.

225

See

letters from PWYP-US (Mar. 16, 2020); and Oxfam American and Earthrights International.

Some commenters also indicated that it is common practice to include a non-confidentiality provision in oil, gas, and mining contracts that allows for the disclosure of information when required by an issuer's home government or its securities exchange.

226

These commenters stated that we should prohibit an issuer from using the exemption if such a standard confidentiality exclusion provision exists. We do not believe that adding such a provision is necessary because an issuer will be required to submit a legal opinion that explains why it is contractually precluded from providing the Section 13(q) disclosure. In such situations, the opinion would necessarily have to address why the issuer is contractually precluded from providing the Section 13(q) disclosure in light of the presence of a contractual provision that expressly permits such disclosure when required by home government laws or securities exchange regulations.

226

See

letters from PWYP-US (Mar. 16, 2020); and Oxfam American and Earthrights International.

One commenter requested that we modify the exemption for conflicts with pre-existing contracts by providing that the exemption applies to contracts signed prior to an issuer's initial public offering, but after the effective date of the final rules.

227

We decline to make this modification because we believe that such an issuer will have received ample notice of the Section 13(q) rules and will have the opportunity to negotiate or modify the contract terms to remedy any conflict. Moreover, as discussed below, we are providing transitional relief for issuers that have recently completed their initial public offering, which should mitigate any resulting hardship.

228

227

See

letter from Davis Polk.

228

See infra

Section II.D.6.

3. Exemption for Smaller Reporting Companies and Emerging Growth Companies

When proposing to exempt smaller reporting companies

229

and emerging growth companies

230

from the scope of Rule 13q-1,

231

we explained that the proposed exemption would be consistent with our statutory duty in a public rulemaking to consider, in addition to investor protection concerns, whether an action will promote efficiency, competition, and capital formation.

232

The proposed exemption also would be consistent with our treatment of smaller reporting companies and emerging growth companies in other rulemakings

233

undertaken since the enactment of the Jumpstart Our Business Startups Act (“JOBS Act”).

234

229

See supra

note 190 for the definition of “smaller reporting company,” as amended.

230

See supra

note 191 for the definition of “emerging growth company.”

231

See

2019 Rules Proposing Release at Section II.J.3. In particular, we expressed concern about the impact of the fixed cost component of the proposed rules on smaller reporting companies and emerging growth companies.

232

See

Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)].

233

See, e.g., Pay Ratio Disclosure,

Release No. 33-9877 (Aug. 5, 2015) [80 FR 50103 (Aug. 18, 2015)] (exempting smaller reporting companies and emerging growth companies, among others, from the scope of the required pay ratio disclosure). Prior to the JOBS Act, the Commission provided a number of accommodations to smaller reporting companies, such as not requiring risk factor disclosure from smaller reporting companies in their Exchange Act registration statements and annual and periodic reports, which continue today.

See, e.g.,

Release No. 33-10825 (Aug. 26, 2020) [85 FR 63726 (Oct. 8, 2020)], note 197.

234

Public Law 112-106, 126 Stat. 306 (2012).

Some commenters supported the proposed exemption for smaller reporting companies and emerging growth companies.

235

For example, one commenter stated that the proposed exemption would provide important cost savings for growing companies.

236

Another commenter indicated that the proposed exemption aligned with the streamlined disclosure requirements typically afforded to smaller and newer reporting issuers.

237

235

See

letters from Chambers and NAM.

236

See

letter from NAM.

237

See

letter from Chamber.

Several other commenters opposed the proposed exemption for smaller reporting companies and emerging growth companies.

238

Most of those commenters opposed the proposed exemption primarily because it would exclude a significant percentage of the issuers that currently report under the EU Directives and Canada's ESTMA and that would have been included under the 2016 Rules.

239

Some commenters also asserted that smaller reporting companies and emerging growth companies are equally susceptible to corruption as larger issuers while posing a greater risk.

240

238

See, e.g.,

letters from Africa Center for Energy Policy; Sens. Cardin

et al.;

the Carter Center; DAR; Shannon Gough; KCSPOG; Oxfam America and Earthrights International; Eric Postel; Public Citizen; PWYP-US (Mar. 16, 2020), F. Samama

et al.;

and Congr. Waters

et al.

239

See, e.g.,

letters from Sens. Cardin

et al.;

Oxfam America and Earthrights International; PWYP-US (Mar. 16, 2020); F. Samama

et al.;

and Eric Postel.

240

See, e.g.,

letters from Public Citizen (stating that smaller reporting companies and emerging growth companies have been involved in the same industry practices that have enabled corruption and misappropriation in the past, and indicating that smaller issuers are generally more susceptible to equity risks than larger issuers because they take more operational risks);

see also

letter from PWYP-US (Mar. 16, 2020).

We continue to be concerned that the fixed cost component of the Section 13(q) rules would have a greater relative impact on smaller reporting companies

and emerging growth companies and thus could impede their growth and access to capital markets.

241

We also understand commenters' concerns about the potentially large number of resource extraction issuers that would be excluded under the proposed exemption and the gap in coverage that would result. Therefore, while we are adopting an exemption for smaller reporting companies and emerging growth companies, we are removing from the scope of the exemption any company that is subject to the resource extraction payment disclosure requirements of an alternative reporting regime that has been deemed by the Commission to require disclosure that satisfies the transparency objectives of Section 13(q).

242

There will be only limited additional costs as such issuers will be able to submit a report complying with the reporting requirements of the alternative jurisdiction to satisfy its Section 13(q) disclosure obligations.

243

241

See infra

Section III.D.2.

242

See

17 CFR 240.13q-1(c).

243

See

17 CFR 240.13q-1(d)(3). We discuss the alternative reporting provision in Section II.N and its associated costs in Section III.D.1.

Those companies eligible for alternative reporting will have a significantly reduced compliance burden under Section 13(q) and therefore will not need the exemption from Section 13(q) reporting as much as those smaller reporting companies and emerging growth companies that are not subject to an alternative reporting regime. We believe that this added limitation will reduce the scope of the exemption while retaining the exemption for companies that otherwise would bear the full burden of the Section 13(q) rules. For these latter companies, neither a smaller reporting company nor an emerging growth company will be required to provide any of the payment disclosure mandated by Section 13(q) and Rule 13q-1.

By tailoring the exemption in this way, we believe that the exemption for smaller reporting companies and emerging growth companies is consistent with the Commission's authority under Section 36(a) of the Exchange Act to adopt an exemption that is necessary or appropriate in the public interest, and consistent with the protection of investors.

244

The added limitation is in the public interest because it promotes the transparency objective of Section 13(q) while permitting smaller reporting companies and emerging growth companies not subject to foreign reporting regimes to reduce their regulatory burdens to the ultimate benefit of their investors.

245

244

See

15 U.S.C. 78mm(a).

245

See supra

note 241.

4. Delayed Reporting for Payments Related to Exploratory Activities

We are adopting a provision permitting delayed reporting of payments related to exploratory activities, as proposed.

246

Pursuant to this provision, issuers will not be required to report payments related to exploratory activities in the Form SD for the fiscal year in which payments are made. Instead, an issuer may delay reporting such payments until it submits a Form SD for the fiscal year following the fiscal year in which the payments were made.

247

We are proposing a limited, delayed approach because we believe that the likelihood of competitive harm from the disclosure of payment information related to exploratory activities diminishes over time. For example, once exploratory activities end and development activities begin, the likelihood of competitive harm from payments terms related to the exploratory activities (

e.g.,

payment information that might reveal the scope or significance of t

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