project-level disclosure and rely on data generated prior to the
implementation of the 2013 EITI Standard.
    \531\ See Andr[eacute]s Mej[iacute]a Acosta, ``The Impact and
Effectiveness of Accountability and Transparency Initiatives: The
Governance of Natural Resources'', Development Policy Review, 31-S1
(2013), s89-s105; and Alexandra Gillies and Antoine Heuty, ``Does
Transparency Work? The Challenges of Measurement and Effectiveness
in Resource-Rich Countries'', Yale Journal of International Affairs,
Spring/Summer 2011, 25-42.
---------------------------------------------------------------------------

    We received several comments on quantifying the potential economic
benefits of the final rules that are discussed in detail below.\532\
Although these comments presented studies that attempt to quantify
those benefits, as discussed below, they each have certain

limitations that we believe prevent us from relying on them to quantify
the final rules' potential benefits in improving accountability and
governance in resource-rich countries around the world. Furthermore, no
other commenters included reliable data that would allow us to quantify
the potential economic benefits of the final rules or suggested a
source of data or a methodology that we could readily look to in doing
so.
---------------------------------------------------------------------------

    \532\ See letter from Profs. Anthony Cannizzaro & Robert Weiner
(Feb. 11, 2016) (``Cannizzaro & Weiner''). See also letters from API
1 (Appendix B) and Publish What You Pay--US (third of three letters
on Mar. 8, 2016) (``PWYP-US 4'') (both referring to a study by P.
Healy and G. Serafeim). These letters and studies primarily focus on
benefits to issuers and investors.
---------------------------------------------------------------------------

    It is also important to note, however, that Congress has directed
us to promulgate this disclosure rule. Thus, we believe it reasonable
to rely on Congress's determination that the rule will produce the
foreign policy and other benefits that Congress sought in imposing this
mandate. Because of the important foreign policy interests at stake, we
believe that Congress' determination that the potential benefits of
disclosure justify such a rule is a decision that is owed considerable
deference, and we do not believe that Congress intended that we second-
guess its determination.
    Moreover, as noted above, we concur with Congress' judgment that
resource extraction payment disclosures could help to achieve a
critical foreign policy objective of the U.S. Government. In reaching
this conclusion, we are particularly mindful that a broad international
consensus has developed on the potential benefits of revenue
transparency.\533\ Not only have the Canadian government \534\ and the
European Union \535\ acknowledged the potential benefits by adopting
disclosure requirements similar to what we are adopting, but even
members of industry through their participation as stakeholders in EITI
have acknowledged the benefits that revenue transparency can
produce.\536\ Perhaps most significantly, industry stakeholders in the
EITI process (which notably includes a number of industry
organizations) \537\ have expressly adopted the position that the EITI
disclosures (which now include identification of the issuers
responsible for the payments and project-level reporting) produce
``[b]enefits for implementing countries'' by ``strengthening
accountability and good governance, as well as promoting greater
economic and political stability.'' \538\ Industry stakeholders in EITI
have similarly accepted the view that ``[b]enefits to civil society
come from increasing the amount of information in the public domain
about those revenues that governments manage on behalf of citizens,
thereby making governments more accountable.'' \539\
---------------------------------------------------------------------------

    \533\ We also credit the views of the State Department and USAID
that the disclosures we are requiring will help reduce corruption
and promote accountability in resource-rich countries. Both agencies
have a high degree of expertise and experience in these matters.
Relatedly, we note that USAID has advanced a persuasive explanation
for ways that the disclosures may help complement the agency's own
efforts to combat corruption and enhance governance globally. See
letter from USAID.
    \534\ See, e.g., ESTMA, Section 6 (``The purpose of this Act is
to implement Canada's international commitments to participate in
the fight against corruption through the implementation of measures
applicable to the extractive sector, including measures that enhance
transparency and measures that impose reporting obligations with
respect to payments made by entities.''). See also ESTMA Guidance,
at 2 (``Canadians will benefit from increased efforts to strengthen
transparency in the extractive sector, both at home and abroad.
Alongside Canada, the United States and European Union countries
have put in place similar public disclosure requirements for their
respective extractive industries. Together these reporting systems
will contribute to raising global transparency standards in the
extractive sector.'').
    \535\ See, e.g., European Commission Memo, ``New disclosure
requirements for the extractive industry and loggers of primary
forests in the Accounting (and Transparency) Directives (Country by
Country Reporting)--frequently asked questions'' (June 12, 2013)
(``The new disclosure requirement will improve the transparency of
payments made to governments all over the world by the extractive
and logging industries. Such disclosure will provide civil society
in resource-rich countries with the information needed to hold
governments to account for any income made through the exploitation
of natural resources, and also to promote the adoption of the
Extractive Industries Transparency Initiative (EITI) in these same
countries. . . . The reporting of payments to government by the
extractive and logging industries will provide civil society with
significantly more information on what specifically is paid by EU
companies to host governments in exchange for the right to extract
the relevant countries' natural resources. By requiring disclosure
of payments at a project level, where those payments had been
attributed to a specific project and were material, local
communities will have insight into what governments were being paid
by EU multinationals for exploiting local oil/gas fields, mineral
deposits and forests. This will also allow these communities to
better demand that government accounts for how the money had been
spent locally. Civil society will be in a position to question
whether the contracts entered into between the government and
extractive and logging companies had delivered adequate value to
society and government.'').
    \536\ For example, in describing its involvement with EITI,
ExxonMobil states that these ``efforts to promote revenue
transparency have helped fight corruption, improve government
accountability and promote greater economic stability around the
world.'' See http://corporate.exxonmobil.com/en/current-issues/accountability/transparency/overview. Similarly, when discussing its
role in EITI, Chevron has acknowledged that revenue transparency is
``an important pathway to improved governance.'' See http://www.chevron.com/Stories/Progress-Partnerships-and-Transparency.
Royal Dutch Shell has also expressed the position that ``[r]evenue
transparency provides citizens with an important tool to hold their
government representatives accountable and to advance good
governance.'' See http://www.shell.com/sustainability/transparency/revenues-for-governments.html.
    \537\ See Stakeholders, available at https://eiti.org/supporters/partnerorganizations (last visited June 16, 2016).
    \538\ https://eiti.org/eiti/benefits.
    \539\ Id.
---------------------------------------------------------------------------

    Notably, none of the industry commenters expressed the view that
the disclosures required by Section 13(q) would fail to help produce
these anti-corruption and accountability benefits. Indeed, several
commenters expressly acknowledged that transparency produces such
benefits (notwithstanding the inability to reliably quantify those
benefits). For example, one industry commenter stated that
``[t]ransparency by governments and companies alike regarding revenue
flows from the extraction of natural resources in a manner which is
meaningful, practical and easily understood by stakeholders reduces the
opportunity for corruption.'' \540\ Another industry commenter
expressed its view ``that the disclosure of revenues received by
governments and payments made by the extractive-industry companies to
governments could lead to improved governance in resource-rich
countries.'' \541\ Yet another industry commenter stated that resource-
revenue transparency efforts ``are fundamental building blocks of good
resource governance and are key to fostering better decision-making
over public revenues.'' \542\
---------------------------------------------------------------------------

    \540\ See letter from BHP.
    \541\ See letter from Chevron.
    \542\ See letter from Eni SpA (Jan. 31, 2016) (``Eni'').
---------------------------------------------------------------------------

    While there is no conclusive empirical evidence that would confirm
whether the project-level, public disclosure that we are adopting will
in fact reduce corruption, in forming our conclusion that payment
transparency will further the identified U.S. foreign policy goals, we
find persuasive the arguments and evidence advanced by several
commenters throughout this rulemaking that have emphasized the
potential benefits to civil society of such public disclosure.\543\ We
note that many of these commenters provided reasons why the benefits to
civil society of contract-based, project-level reporting would help to
reduce corruption and promote accountability more effectively than more
aggregated reporting, such as country-level reporting.\544\
---------------------------------------------------------------------------

    \543\ See, e.g., letters from Global Witness 1, The ONE Campaign
(Mar. 16, 2016) (``ONE Campaign''), Oxfam, PWYP-US 3, TI-USA, and
USAID.
    \544\ See letter from Oxfam, PWYP-US 1, TI-USA.
---------------------------------------------------------------------------

    To support their claims, these commenters provided numerous
examples of ways in which disaggregated payment information can be
effective in helping to reduce corruption and promote accountability,
and no commenters disputed these

examples.\545\ For example, these commenters stated that public
availability of project-level data would enable civil society groups,
citizens, and local communities to know how much their governments earn
from the resources that are removed from their respective territories
when the governments deny them such information. In addition, according
to some commenters, the disclosure of project-level data will help
citizens to monitor public expenditures for efficiency and
effectiveness, allow citizens and governments to ensure that revenues
are being redistributed by the central government to localities
properly (according to benefit-sharing agreements), and provide a basis
for communities to advocate with the government for public
services.\546\ One commenter suggested that project-level disclosure
will empower citizens and civil society organizations to ensure that
extractive revenues are used to generate public benefits for all and
not just to enrich the elite, assist citizens to assess the development
impact of extraction locally, and promote economic and social
development, especially in communities that host natural resource
extraction operations.\547\ These commenters also stated that this
information would help empower civil society organizations to advocate
for a fairer share of revenues, double-check government-published
budget data, and better calibrate their expectations from the
extractive issuers. Commenters on the 2010 Proposing Release provided
similar arguments.\548\
---------------------------------------------------------------------------

    \545\ See Section I of the Proposing Release.
    \546\ See letter from ACEP, Publish What You Pay--US (Apr. 15,
2014) (``PWYP 7 (pre-proposal)''), and TI-USA.
    \547\ See letter from PWYP 7 (pre-proposal).
    \548\ See, e.g., letters from Global Witness (Feb. 25, 2011)
(``Global Witness 1 (pre-proposal)''); National Advocacy Coalition
on Extractives (Feb. 10, 2015) (``NACE (pre-proposal)''); Oxfam
America (Feb. 21, 2011) (``Oxfam 1 (pre-proposal)''); Publish What
You Pay U.S. (Feb. 25, 2011) (``PWYP 1 (pre-proposal)''); Publish
What You Pay Cameroon (June 8, 2015)(``PWYP-CAM (pre-proposal)'');
Publish What You Pay--Indonesia (Mar. 11, 2015)(``PWYP-IND (pre-
proposal)''); Publish What You Pay--Zimbabwe (Feb. 20, 2015)
(``PWYP-ZIM (pre-proposal)''); Revenue Watch Institute (Feb. 17,
2011) (``RWI 1 (pre-proposal)''); and Syena Capital Management LLC
(Feb. 17, 2011) (``Syena (pre-proposal)'').
---------------------------------------------------------------------------

a. Currently Available Empirical Analyses on Potential Social Gains
From Transparency
    As a threshold matter, we think it is important to observe that the
EITI and other global transparency efforts are relatively new, which
makes it difficult at this time to draw any firm empirical conclusions
about the potential long-term benefits that such transparency regimes
may produce for resource-rich countries. The causal mechanisms involved
are complex (impacted by myriad factors) and it may take several
decades before those mechanisms yield empirically verifiable social
gains.\549\
---------------------------------------------------------------------------

    \549\ See, e.g., studies cited in the note 531 above.
---------------------------------------------------------------------------

    A few commenters on the Proposing Release argued that the rules
implementing Section 13(q) would generate societal benefits and cited
studies that attempt to measure those benefits for countries that join
the EITI.\550\ While these studies provide useful insight into the
potential benefits to be derived from resource payment transparency
regimes, as discussed more fully below, we believe that there are
limitations associated with each of these studies that make it
difficult for us to draw firm conclusions based on their findings.
---------------------------------------------------------------------------

    \550\ See letters from PWYP-US 1 and Corrigan.
---------------------------------------------------------------------------

    One commenter presented a study that found a significant increase
in GDP when a resource-rich country joins the EITI.\551\ The study also
found that the increase in GDP appears to be larger the more dependent
a country's economy is on natural resource sectors. While the study is
informative, we have not relied on it to form any quantitative
conclusions. The study does not take into account other factors that
could be driving the increase in GDP and that could be correlated with
a country's participation in the EITI. While the study controls for
time-invariant (or country-specific) factors in the empirical model, it
does not control for time-varying factors that could be driving the
results, such as the change in the quality of the institutions in a
country. It is possible that non-EITI driven institutional improvements
over the period of time used in the study contributed to the increase
in GDP. It is also possible that the improvement in institutions had an
impact on the country's decision to join the EITI.
---------------------------------------------------------------------------

    \551\ See letter from Corrigan (citing her earlier study:
Corrigan, C. C. (2014). Breaking the Resource Curse: Transparency in
the Natural Resource Sector and the Extractive Industries
Transparency Initiative. Resources Policy, 41(1), 17-30).
---------------------------------------------------------------------------

    Another commenter cited two studies that examined the effect of a
country joining the EITI on net foreign direct investment
(``FDI'').\552\ One of the studies found that joining the EITI
increased net FDI inflow by 50 percent, although the statistical
significance of the results is marginal.\553\ The other study also
found that joining the EITI increased the net FDI as a fraction of GDP
by two percent.\554\ This second study, however, did not fully control
for other factors that could jointly drive the increase in net FDI and
affect the country's decision to join EITI, such as improvements in the
quality of the country's institutions and overall improvement in the
country's transparency. Thus, both of these studies have limitations
that lessen our confidence in their results and hence our willingness
to rely on them to quantify benefits from resource extraction payment
transparency.
---------------------------------------------------------------------------

    \552\ See letter from PWYP-US 1 (citing Fernando Londo[ntilde]o,
``Does Joining the Extractive Industries Transparency Initiative
Have an Impact on Extractive and Non-Extractive FDI Inflows?''
(2014), available at http://gppreview.com/wp-content/uploads/2014/02/Londono-F.pdf) (``Londo[ntilde]o Study'') and Maya Schmaljohann,
``Enhancing Foreign Direct Investment via Transparency? Evaluating
the Effects of the EITI on FDI'' (Jan. 2013), available at http://archiv.ub.uni-heidelberg.de/volltextserver/14368/1/Schmaljohann_2013_dp538.pdf (``Schmaljohann Study'')).
    \553\ See Londo[ntilde]o Study.
    \554\ See Schmaljohann Study.
---------------------------------------------------------------------------

    Another commenter presented two single country-based case studies
of conflict and unrest, which the commenter attributed to corruption
and lack of transparency. The studies measured the economic impact of
such conflict and unrest on U.S. oil companies and used the avoidance
of such economic costs as a means of quantifying the societal benefits
of transparency.\555\ In the first case study, the costs are estimated
as the difference in revenues in years with conflict and unrest and a
base year without such conflicts and unrest. The combined cost
estimates from that study are approximately $17.4 billion over the
period 2011-2014. In the second case study, the costs are estimated as
unrealized revenues due to shut-in production events that are caused by
conflict and unrest. The combined cost estimates from that study are
approximately $14.7 billion over the period 2003-2016. In these case
studies, however, it is difficult to distinguish the role that
corruption and the lack of transparency played in stirring a country's
conflict and unrest from the role that other factors such as ethnic
conflicts, religious conflicts, and political repression may have
played.
---------------------------------------------------------------------------

    \555\ See letter from ONE Campaign.
---------------------------------------------------------------------------

    One commenter cited its own study suggesting that high levels of
corruption (measured by bribery) correspond to lower levels of economic
development.\556\ The study found that higher levels of bribery were
associated with higher maternal mortality, lower youth literacy rate,
and lower access to basic sanitation. The same commenter cited another
study that suggested that

even small improvements in a country's governance resulted in higher
income and lower infant mortality rates in the long run.\557\ These
findings seem broadly consistent with findings from other studies on
the relationship between corruption and economic development.\558\
---------------------------------------------------------------------------

    \556\ See letter from TI-USA.
    \557\ See Daniel Kaufmann, Governance Matters 2010: Worldwide
Governance Indicators Highlight Governance Successes, Reversals and
Failures, available at http://www.brookings.edu/research/opinions/2010/09/24-wgi-kaufmann.
    \558\ See Section I.E of the Proposing Release.
---------------------------------------------------------------------------

b. Potential Benefits to Issuers and Investors From Transparency
    To the extent that the final rules increase transparency and thus
reduce corruption, they would increase efficiency and capital
formation. While the objectives of Section 13(q) may not appear to be
ones that would necessarily generate measurable, direct economic
benefits to investors or issuers, investors and issuers might benefit
from the final rules' indirect effects. In the following paragraphs, we
discuss existing theoretical arguments and empirical evidence that
reduced corruption and better governance could have longer term
positive impacts on economic growth and investment in certain countries
where the affected issuers operate, which could in turn benefit issuers
and their shareholders.
    Although the research and data available at this time does not
allow us to draw any firm conclusions, we have considered several
theoretical causal explanations for why reductions in corruption may
increase economic growth and political stability, which in turn may
reduce investor risk.\559\ High levels of corruption could introduce
inefficiencies in market prices as a result of increased political
risks and the potential awarding of projects to companies for reasons
other than the merit of their bids. This, in turn, could prop up
inefficient companies and limit investment opportunities for others.
These potential distortions could have a negative impact on the
economies of countries with high corruption, particularly to the extent
that potential revenue streams are diminished or diverted.
Additionally, the cost of corrupt expenditures, direct or indirect,
impacts profitability, and, if the cost is sufficiently high, some
potentially economically efficient or productive investments may not be
made. Thus, reducing corruption could increase the number of productive
investments and the level of profitability of each investment and could
lead to improved efficiency in the allocation of talent, technology,
and capital. Insofar as these effects are realized, each of them could
benefit issuers operating in countries with reduced corruption levels.
These and other considerations form a basis for several dynamic general
equilibrium models predicting a negative relationship between
corruption and economic development.\560\
---------------------------------------------------------------------------

    \559\ See, e.g., reviews by P. Bardhan, ``Corruption and
Development: A Review of Issues,'' Journal of Economic Literature,
35, no. 3, 1320-1346 (1997) and J. Svensson, ``Eight Questions about
Corruption,'' Journal of Economic Perspectives, 19, no. 3, 19-42
(2005).
    \560\ See, e.g., I. Ehrlich and F. Lui ``Bureaucratic Corruption
and Endogenous Economic Growth,'' Journal of Political Economy, 107
(6), 270-293 (1999); K. Blackburn, N. Bose, and E.M. Haque, ``The
Incidence and Persistence of Corruption in Economic Development,''
Journal of Economic Dynamics and Control 30, 2447-2467 (2006); and
C. Leite and J. Weidmann, ``Does Mother Nature Corrupt? Natural
Resources, Corruption, and Economic Growth,'' International Monetary
Fund Working Paper No. 99/85 (July 1999).
---------------------------------------------------------------------------

    A number of empirical studies have also shown that reducing
corruption might result in an increase in the level of GDP and a higher
rate of economic growth through more private investments, better
deployment of human capital, and political stability.\561\ Other
studies find that corruption reduces economic growth both directly and
indirectly, through lower investments.\562\ To the extent that
increased transparency could lead to a reduction in corruption and, in
turn, improved political stability and investment climate, some
investors may consider such factors in their investment decisions,
including when pricing resource extraction assets of affected issuers
operating in these countries.\563\ We note that some commenters on the
Proposing Release supported this view.\564\
---------------------------------------------------------------------------

    \561\ See, e.g., P. Mauro, ``The effects of corruption on
growth, investment and government expenditure: A cross country
analysis,'' in K.A. Elliot (ed.) Corruption and the Global Economy,
Washington DC: Institute for International Economics, 83-107 (1997);
H. Poirson, ``Economic Security, Private Investment, and Growth in
Developing Countries,'' International Monetary Fund Working Paper
No. 98/4 (Jan. 1998); Institute for Economics and Peace, Peace and
Corruption Report (2015).
    \562\ See Pak Hung Mo, ``Corruption and Economic Growth,''
Journal of Comparative Economics 29, 66-79 (2001); K. Gyimah-
Brempong, ``Corruption, economic growth, and income inequality in
Africa,'' Economics of Governance 3, 183-209 (2002); and Pierre-
Guillaume M[eacute]on and Khalid Sekkat, ``Does corruption grease or
sand the wheels of growth?'' Public Choice 122, 69-97 (2005).
    \563\ Several studies present evidence that reduction in
corruption increases foreign direct investments. See, e.g., S.-J.
Wei, ``How Taxing is Corruption on International Investors?'' NBER
Working Paper 6030 (1997) and G. Abed and H. Davoodi, ``Corruption,
Structural Reforms, and Economic Performance in the Transition
Economies,'' International Monetary Fund Working Paper No. 00/132
(July 2000).
    \564\ See letter from ACTIAM et al., Calvert, and PWYP-US 1.
---------------------------------------------------------------------------

    There also could be positive externalities from increased investor
confidence to the extent that improved economic growth and investment
climate could benefit other issuers working in those countries.
Although we believe the evidence is presently too inconclusive to allow
us to predict the likelihood that such a result would occur, we note
that there is some empirical evidence suggesting that lower levels of
corruption might reduce the cost of capital and improve valuations for
some issuers.\565\
---------------------------------------------------------------------------

    \565\ See D. Kaufmann and S. J. Wei ``Does `Grease Money' Speed
Up the Wheels of Commerce?'' NBER Working Paper 7093 (1999)
(finding, based on survey evidence, that firms that pay fewer bribes
have lower, not higher, cost of capital); and C. Lee and D. Ng,
``Corruption and International Valuation: Does Virtue Pay?'' Journal
of Investing, 18, no. 4, 23-41 (2009) (finding that firms from more
corrupt countries trade at significantly lower market multiples).
---------------------------------------------------------------------------

    One commenter asserted that the studies cited above discuss
primarily a single form of corruption--bribery--that in the commenter's
view is not subject to the disclosures required by Section 13(q) and
hence the commenter contended that these studies do not support our
view that the required disclosures might achieve economic benefits
resulting from reduced corruption.\566\ We acknowledge that the
specific studies that the commenter mentions do focus on bribery as a
form of corruption. All the other studies that we cite, which are not
specifically mentioned by the commenter, do discuss corruption in
general and its effect on economic growth. In fact, some specifically
discuss the type of corruption addressed by the final rules.\567\
Furthermore, to the extent that Section 13(q) is successful in reducing
the corruption in the form of misuse of funds, it could also reduce
quid-pro-quo corruption as well. For example, if the government and
issuers are more strictly

monitored by citizens and society as a result of the final rules, they
may become more reluctant to engage in quid-pro-quo corruption. It is
also possible that some of the payments that are reportable under
Section 13(q) are an implicit form of bribery: For example, government
officials could agree, instead of a bribe, to receive another type of
payment from an issuer that could be expropriated by these officials
later, after the payment is made. If the disclosure under Section 13(q)
is successful in decreasing the misuse of funds, this type of implicit
quid-pro-quo corruption could be reduced as well.
---------------------------------------------------------------------------

    \566\ See letter from API 1. As we explained above, we believe
that this commenter has an unduly narrow view of the anti-corruption
objectives of Section 13(q) and, thus, we disagree with the claim
that Section 13(q) is unconcerned with helping to reduce bribery.
See Section II.E.3.
    \567\ See, e.g., the study by J. Svensson at note 559 above,
which defines corruption as misuse of public office for private
gain. That study cites examples of corruption that are similar to
the types of corruption the final rules are trying to address. For
example, the study discusses the diversion of funds allocated to
school districts in Uganda and road building projects in Indonesia
by government officials in these countries. In Uganda, according to
the study, only 13 percent of the funds allocated to the school
districts actually reached them; the bulk of the grants was captured
by local government officials and politicians. As this evidence
became known and the central government began to publish newspaper
accounts of monthly transfers to districts, so that school staff and
parents could monitor local officials, schools received an average
of 80 percent of their annual entitlements.
---------------------------------------------------------------------------

    We also note that some commenters on the Proposing Release \568\
stated that the disclosures required by Section 13(q) could provide
useful information to investors in making investment decisions.
Although we do not believe this is the primary purpose of the required
disclosures, we acknowledge the possibility that the disclosures could
provide potentially useful information to certain investors. Some
commenters, for example, stated that the new disclosures could help
investors better assess the risks faced by resource extraction issuers
operating in resource-rich countries.\569\
---------------------------------------------------------------------------

    \568\ See letters from Bean, Calvert, ITWF, Peck & Chayes, Sen.
Cardin et al., Sen. Lugar et al., TI-USA, and USSIF.
    \569\ See letters from Calvert, Columbia Center on Sustainable
Investment (Oct. 30, 2015) (``Columbia Center (pre-proposal)''), and
ACTIAM et al. Some commenters on the 2010 Proposing Release had
similar views. See, e.g., letters from EarthRights International
(Sept. 20, 2011) (``ERI 2 (pre-proposal)''); Global Witness 1 (pre-
proposal); PGGM Investments (Mar. 1, 2011) (``PGGM (pre-
proposal)''); and Oxfam 1 (pre-proposal).
---------------------------------------------------------------------------

    One of these commenters identified several benefits that project-
level reporting would generate for investors.\570\ First, according to
the commenter, such reporting would help investors assess the
effectiveness of the diversification of risks within a portfolio by
enabling them to understand better the risk profiles of individual
projects within a given country and the contribution of each project to
the overall returns and variation in returns of the portfolio of
projects that an issuer has in that country. Another commenter
expressed a similar view.\571\ We note, however, that additional
information, beyond the disclosure required by Section 13(q), is needed
to estimate returns and variation of returns of a project or portfolio
of projects in a given country. For example, investors and analysts
will need cash flow information (revenues and total costs, not only
those paid to the local government) and cost of capital per project,
which may not be readily available. Thus, the extent to which the
disclosure required by Section 13(q) may generate this particular
benefit is unclear.
---------------------------------------------------------------------------

    \570\ See letter from Columbia Center (pre-proposal).
    \571\ See letter from Robert F. Conrad, Ph.D. (July 17, 2015)
(``Conrad (pre-proposal)'').
---------------------------------------------------------------------------

    A second benefit for investors, according to the commenter, is that
project-level reporting would help adjust assumptions on a major cost
to the project: the effective tax rate of the host government, the
total taxes and other payments to governments. The commenter provided a
hypothetical example in which information on the effective tax rate
paid increases the estimate of the value of the company by three
percent. While the benefit of having accurate tax information when
valuing a project or a company is indisputable, it is unlikely, as we
indicated above, that an investor or analyst will have accurate
information for other components (e.g., revenues, total costs, and cost
of capital) necessary to value a project. If those components must be
estimated, as is typically the case, the detailed tax information may
not have a first order effect on project/company value, or at least may
not yield a substantial advantage over simply using the marginal tax
rate of the host country.
    A third benefit for investors, according to the commenter, is that
the project-level disclosure would help investors assess the issuer's
exposure to commodity price downturns by analyzing industry cost curves
to forecast commodity prices. As noted above, such benefit assumes that
all other relevant costs (e.g., production costs and capital
expenditures), besides the one reported under Section 13(q), are known
to investors, which may not be the case.
    A fourth benefit for investors, according to the commenter, is that
project-level disclosure would result in lower cost of capital because
it makes firms more transparent and thus creates trust with investors.
The commenter cites two studies that find a positive link between
transparency and cost of capital. The studies, however, do not provide
evidence that resource extraction transparency in particular leads to
lower cost of capital; rather, the studies conclude more generally that
earnings transparency and the strength of the country's securities
regulations can have a major impact on cost of capital. Transparency
regarding key company financial and accounting information will likely
have a stronger effect on cost of capital than transparency regarding
the company's resource payments.\572\
---------------------------------------------------------------------------

    \572\ Finance theory implies that a firm's cost of capital
depends primarily on the covariance between its future free cash
flows and the cash flows from other available investments in the
market. See, e.g., R. Lambert, C. Leuz, and R. Verrecchia,
``Accounting information, disclosure, and the cost of capital,''
Journal of Accounting Research, 45, 385-420 (2007). The relevant
free cash flows apply to the entire firm, as reflected in its
overall disclosures and top line financial measures. Because
resource payments are already incorporated within a firm's reported
cash flows, improved transparency about resource payments is
unlikely to have a large impact on a firm's cost of capital.
---------------------------------------------------------------------------

    A fifth benefit for investors, according to the commenter, is that
increased transparency may lead to lower political risk. Such a
benefit, however, depends not only on resource extraction payment
disclosure, but also on other types of disclosure and the quality of
the governance of the host country. Disclosure under Section 13(q) by
itself may not result in lower political risk.
    While we acknowledge all these comments, we believe that the direct
incremental benefit to investors from this information may be limited
given that most impacted issuers, other than smaller reporting
companies,\573\ are already required to disclose their most significant
operational and financial risks as well as certain financial
information related to the geographic areas in which they operate in
their Exchange Act annual reports.\574\
---------------------------------------------------------------------------

    \573\ About 43 percent of affected issuers are smaller reporting
companies that are not obligated to disclose in their Exchange Act
annual reports significant risk factors they face. For such
companies, the resource extraction payments disclosure could provide
incremental information that might benefit some investors, to the
extent that they would not otherwise have a requirement to disclose
the political or economic risks related to operating in resource-
rich countries. We do not, however, have data on whether such
companies have material operations in politically volatile regions
and whether they have exposure to risks described by commenters.
    \574\ See Item 1A and Item 10(d)(3) of Form 10-K and Item 3.D of
Form 20-F. See also Item 1 of Form 10-K which requires disclosure of
revenues from external customers attributed to any individual
foreign country, if material, and long lived assets located in any
individual foreign country, if material and Item B.2 of Form 20-F
which requires disclosure of the principal markets in which the
company competes, including a breakdown of total revenues by
category of activity and geographic market for each of the last
three financial years. In addition, pursuant to Item 7 of Form 10-K
and Item 5D Form 20-F, registrants other than smaller reporting
companies are required to provide a discussion of any known trends
or uncertainties that the registrant reasonably expects will have a
material favorable or unfavorable impact on net sales or revenues or
income from continuing operations or the registrant's liquidity.
---------------------------------------------------------------------------

    In response to the Proposing Release, one commenter suggested an
additional approach to quantify the rule's benefits to investors.\575\
A few other commenters

referenced another study using a similar methodology.\576\ Both of
these studies use issuers' stock price reaction to various events
associated with the rulemaking process to measure investors' view on
the effect of the rule on the value of their investments.\577\ The
studies posit that aggregating stock market gains or losses (adjusted
for other factors) for resource extraction issuers around the relevant
events enables the quantification of the aggregate monetary gains or
losses that investors attribute to the rule. We note that even though
these two studies use similar approaches (i.e., an event study) to
quantify the potential benefits to investors, they arrive at somewhat
different conclusions with respect to the rule's perceived
benefits.\578\
---------------------------------------------------------------------------

    \575\ See letter from Cannizzaro and Weiner.
    \576\ See letters from API 1 (Appendix B) and PWYP-US 4 that
both refer to the study by P. Healy and G. Serafeim, ``Voluntary,
Self-Regulatory and Mandatory Disclosure of Oil and Gas Company
Payments to Foreign Governments'', Working Paper (2015), available
at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1961404.
    \577\ Cannizzaro and Weiner consider four events: the adoption
of the rule by the Commission on August 22, 2012, the API lawsuit
filing on October 10, 2012, the vacation of the rule by the court on
July 2, 2013, and the December 11, 2015, reproposal of the rule.
Healy and Serafeim consider seven events: the House-Senate
Conference Committee meeting on the Dodd-Frank Act on June 24, 2010,
the passage of the Dodd-Frank Act on June 26, 2010, the signing of
the Dodd-Frank Act on July 21, 2010, the adoption of the rule by the
Commission on August 22, 2012, the API lawsuit filing on October 10,
2012, the vacation of the rule by the court on July 2, 2013, and the
API comment letter submission on November 7, 2013.
    \578\ The studies use different events, sample selection
criteria, and measures of expected return. Healy and Serafeim found
that investors negatively reacted to relevant events: they find that
the average cumulative abnormal return for 26 stocks in their sample
for the 3-day window around the days of studied events is -1.90% for
events that increase probability that the rules would be implemented
and +1.06% for events that decrease the probability that the rules
would be implemented. Cannizzaro and Weiner generally found that
investors positively reacted to relevant events. They find that the
median cumulative abnormal returns for indexes or exchange traded
funds that focus on extractive industries for the 3-day (7-day)
window around the days of studied events are +0.28% (+0.26%) and
+0.66% (+1.83%) for events that increase probability that the rules
would be implemented and +0.35% (-0.31%) and -2.77% (-4.83%) for
events that decrease the probability that the rules would be
implemented.
---------------------------------------------------------------------------

    We carefully considered each of these studies, but note that there
are a number of potential limitations in the analysis: certain of the
events used in these studies may be confounded by other events; \579\
neither of the studies considers alternative measures of expected
market return; \580\ and neither of the studies reports the statistical
significance of their findings. Consequently, we are unable to rely on
these studies to draw unambiguous conclusions about investors'
attitudes towards the overall effect of the costs and benefits of the
rule as expressed in their valuation of resource extraction issuers on
certain event dates.
---------------------------------------------------------------------------

    \579\ For example, the Dodd-Frank Act is a multipart law, of
which Section 13(q) is just one part. Therefore, it is not clear
whether the reported results describe the market reaction to the
entire Dodd-Frank Act or to Section 13(q) only.
    \580\ For example, the Healy and Serafeim study does not adjust
expected stock return for the change in oil, natural gas, or other
commodities prices, and the Cannizzaro and Weiner study does not
consider alternative models of market return (e.g., the Fama-French
three-factor model).
---------------------------------------------------------------------------

2. Costs
    We received a number of comments on the compliance costs that would
be imposed by the proposed rules. We first summarize these comments in
the subsection immediately below and then, in the following
subsections, we assess these comments as part of our discussion of the
final rules' potential direct and indirect compliance costs and their
potential effects on competition.
a. Commenters' Views of Compliance Costs
    Many commenters stated that the reporting regime mandated by
Section 13(q) would impose significant compliance costs on issuers.
During the comment period after the 2010 Proposing Release, several
commenters specifically addressed the cost estimates presented in the
Paperwork Reduction Act (``PRA'') section of that release.\581\ Other
commenters discussed the costs and burdens to issuers generally as well
as costs that could have an effect on the PRA analysis.\582\ In the
Proposing Release, in response to comments previously received, we
revised our estimates of both initial and ongoing compliance costs. In
addition, also in response to comments, we made several changes to our
PRA estimates that were designed to better reflect the burdens
associated with the new disclosure requirements. In response to the
Proposing Release, a number of commenters submitted letters reiterating
and emphasizing the potential of the proposed rules to impose
substantial costs.\583\ Only one commenter suggested an alternative
quantitative estimate of the direct compliance costs.\584\ We discuss
this estimate below, after a brief discussion of the comments on the
cost estimates that were provided on the 2010 Proposing Release.
---------------------------------------------------------------------------

    \581\ See the following pre-proposal letters from American
Petroleum Institute (Jan. 28, 2011) (``API 1 (pre-proposal)'');
American Petroleum Institute (Aug. 11, 2011) (``API 2 (pre-
proposal)''); Barrick Gold Corporation (Feb. 28, 2011) (``Barrick
Gold (pre-proposal)''); ERI 2 (pre-proposal); Exxon Mobil (Jan. 31,
2011) (``ExxonMobil 1 (pre-proposal)''); ExxonMobil (Oct. 25, 2011)
(``ExxonMobil 3 (pre-proposal)''); National Mining Association (Mar.
2, 2011) (``NMA 2 (pre-proposal)''); Rio Tinto plc (Mar. 2, 2011)
(``Rio Tinto (pre-proposal)''); Royal Dutch Shell plc (Jan. 28,
2011) (``RDS 2 (pre-proposal)''); and Royal Dutch Shell (Aug. 1,
2011) (``RDS 4 (pre-proposal)'').
    \582\ See, e.g., letters from British Petroleum p.l.c. (Feb. 11,
2011) (``BP 1 (pre-proposal)''); Chamber of Commerce Institute for
21st Century Energy (Mar. 2, 2011) (``Chamber Energy Institute (pre-
proposal)''); Chevron Corporation (Jan. 28, 2011) (``Chevron (pre-
proposal)''); Cleary Gottlieb Steen & Hamilton (Mar. 2, 2011)
(``Cleary (pre-proposal)''); Hermes Equity Ownership Services Ltd.
(Mar. 2, 2011) (``Hermes (pre-proposal)''); and PWYP 1 (pre-
proposal).
    \583\ See, e.g., letters from API 1 and ExxonMobil 1.
    \584\ See letter from Claigan Environmental (Feb. 16, 2016)
(``Claigan'').
---------------------------------------------------------------------------

    Some commenters on the 2010 Proposing Release disagreed with our
industry-wide estimate of the total annual increase in the collection
of information burden and argued that it underestimated the actual
costs that would be associated with the rules.\585\ These and other
commenters stated that, depending upon the final rules adopted, the
compliance burdens and costs arising from implementation and ongoing
compliance with the rules would be significantly higher than those
estimated by the Commission.\586\ However, these commenters generally
did not provide quantitative analysis to support their estimates.\587\
---------------------------------------------------------------------------

    \585\ See letters from API 1 (pre-proposal), ExxonMobil 1 (pre-
proposal).
    \586\ See letters from API 1 (pre-proposal); API 2 (pre-
proposal); American Petroleum Institute (Jan. 19, 2012) (``API 3
(pre-proposal)''); Barrick Gold (pre-proposal); ExxonMobil 1 (pre-
proposal); NMA 2 (pre-proposal); Rio Tinto (pre-proposal); and RDS 2
(pre-proposal).
    \587\ See letters from API 1 (pre-proposal) and ExxonMobil 1
(pre-proposal). ExxonMobil 1 (pre-proposal) did provide estimated
implementation costs of $50 million if the definition of ``project''
is narrow and the level of disaggregation is high across other
reporting parameters. This estimate is used in our analysis below of
the expected implementation costs.
---------------------------------------------------------------------------

    Commenters on the 2010 Proposing Release also stated that
modifications to issuers' core enterprise resource planning systems and
financial reporting systems would be necessary to capture and report
payment data at the project level, for each type of payment, government
payee, and currency of payment.\588\ These commenters estimated that
the resulting initial implementation costs would be in the tens of
millions of dollars for large issuers and millions of dollars for many
small issuers.\589\ Two of these commenters provided examples of the

modifications that would be necessary, including establishing
additional granularity to existing coding structures (e.g., splitting
accounts that contain both government and non-government payment
amounts), developing a mechanism to appropriately capture data by
``project,'' building new collection tools within financial reporting
systems, establishing a trading partner structure to identify and
provide granularity around government entities, establishing
transaction types to accommodate types of payment (e.g., royalties,
taxes, or bonuses), and developing a systematic approach to handle
``in-kind'' payments.\590\ These two commenters estimated that total
industry costs for initial implementation of the final rules could
amount to hundreds of millions of dollars.\591\
---------------------------------------------------------------------------

    \588\ See letters from API 1 (pre-proposal); ExxonMobil 1 (pre-
proposal); and RDS 2 (pre-proposal).
    \589\ See letters from API 1 (pre-proposal); ExxonMobil 1 (pre-
proposal); and RDS 2 (pre-proposal). These commenters did not
describe how they defined small and large issuers.
    \590\ See letters from API 1 (pre-proposal) and ExxonMobil 1
(pre-proposal).
    \591\ See letters from API 1 (pre-proposal) and ExxonMobil 1
(pre-proposal).
---------------------------------------------------------------------------

    These commenters added that these estimated costs could be
significantly greater depending on the scope of the final rules.\592\
They suggested, for example, that costs could increase depending on how
the final rules define ``project'' and whether the final rules require
reporting of non-consolidated entities, require ``net'' and accrual
reporting, or require an audit.\593\ Another commenter estimated that
the initial set up time and costs associated with the rules
implementing Section 13(q) would require 500 hours for the issuer to
change its internal books and records and $100,000 in information
technology consulting, training, and travel costs.\594\ One commenter
representing the mining industry estimated that start-up costs,
including the burden of establishing new reporting and accounting
systems, training local personnel on tracking and reporting, and
developing guidance to ensure consistency across reporting units, would
be at least 500 hours for a mid-to-large sized multinational
issuer.\595\
---------------------------------------------------------------------------

    \592\ See letters from API 1 (pre-proposal); ExxonMobil 1 (pre-
proposal); and RDS 2 (pre-proposal).
    \593\ See letters from API 1 (pre-proposal); ExxonMobil 1 (pre-
proposal); and RDS 2 (pre-proposal). As previously discussed, the
final rules do not require the payment information to be audited or
reported on an accrual basis; therefore, commenters' concerns about
possible costs associated with these items should be alleviated. See
Section II.G.5 of the Proposing Release.
    \594\ See letter from Barrick Gold (pre-proposal).
    \595\ See letter from NMA 2 (pre-proposal).
---------------------------------------------------------------------------

    Two commenters stated that arriving at a reliable estimate for the
ongoing annual costs of complying with the rules would be difficult
because the rules were not yet fully defined but suggested that a
``more realistic'' estimate than the estimate included in the 2010
Proposing Release is hundreds of hours per year for each large issuer
that has many foreign locations.\596\ Commenters also indicated that
costs related to external professional services would be significantly
higher than the Commission's estimate, resulting primarily from XBRL
tagging and higher printing costs, although these commenters noted that
it is not possible to estimate these costs until the specific
requirements of the final rules are determined.\597\
---------------------------------------------------------------------------

    \596\ See letters from API 1 (pre-proposal) and ExxonMobil 1
(pre-proposal) (each noting that estimates would increase if the
final rules contain an audit requirement or if the final rules are
such that issuers are not able to automate material parts of the
collection and reporting process).
    \597\ See letters from API 1 (pre-proposal) and ExxonMobil 1
(pre-proposal).
---------------------------------------------------------------------------

    One commenter on the 2010 Proposing Release estimated that ongoing
compliance with the rules implementing Section 13(q) would require 100-
200 hours of work at the head office, an additional 100-200 hours of
work providing support to its business units, and 40-80 hours of work
each year by each of its 120 business units, resulting in an
approximate yearly total of 4,800-9,600 hours and $2,000,000-
$4,000,000.\598\ One large multinational issuer estimated an additional
500 hours each year, including time spent to review each payment to
determine if it is covered by the reporting requirements and ensure it
is coded to the appropriate ledger accounts.\599\ Another commenter
representing the mining industry estimated that, for an issuer with a
hundred projects or reporting units, the annual burden could be nearly
10 times the estimated PRA burden set out in the 2010 Proposing
Release.\600\ This commenter stated that its estimate takes into
account the task of collecting, cross-checking, and analyzing extensive
and detailed data from multiple jurisdictions around the world, as well
as the potential for protracted time investments to comply with several
aspects of the rules proposed in 2010 that are not included in the
current final rules.\601\ This commenter also stated that the estimate
in the 2010 Proposing Release did not adequately capture the burden to
an international company with multiple operations where a wide range of
personnel would need to be involved in capturing and reviewing the data
for the required disclosures as well as for electronically tagging the
information in XBRL format.\602\
---------------------------------------------------------------------------

    \598\ See letter from Rio Tinto (pre-proposal). These estimates
exclude initial set-up time required to design and implement the
reporting process and develop policies to ensure consistency among
business units. They also assume that an audit is not required.
    \599\ See letter from Barrick Gold (pre-proposal).
    \600\ See letter from NMA 2 (pre-proposal).
    \601\ See id. Most of the time investments outlined by this
commenter would not apply to the final rules, such as the cost of
seeking information from non-consolidated ``controlled'' entities,
obtaining compliance advice on the application of undefined terms
such as ``project,'' and reviews of the disclosure in connection
with periodic certifications under the Sarbanes Oxley Act. Certain
potential costs outlined by the commenter, however, would apply to
the final rules, such as those associated with implementing new
systems based on our final definition of ``project'' and other
definitions and costs associated with attempting to secure an
exemption from the Commission when foreign law prohibitions on
disclosure apply.
    \602\ See letter from NMA 2 (pre-proposal).
---------------------------------------------------------------------------

    In response to the Proposing Release, only one commenter suggested
an alternative quantitative estimate of the direct compliance
costs.\603\ The commenter's suggested approach is different from other
approaches suggested by commenters and from the approach presented in
the Proposing Release in that it considers aggregate industry costs
directly rather than on a per issuer basis. Starting from an estimate
of the total number of fields or mines in the world, the commenter
first derived an estimate of the number of projects per field or mine
that might be reportable under the final rules. The commenter then
multiplied the number of reportable projects by the estimated cost for
an issuer to report its activities for an individual field or mine to
calculate total compliance costs to be incurred by all issuers. The
quantitative estimates derived from this approach are within our range
of estimates (see the numerical comparison in Section III.B.2.b.
below). However, we note that some of the commenter's assumptions are
not fully explained (e.g., the number of internal and external hours
per issuer per field or mine that issuers would spend on compliance
with the rules).
---------------------------------------------------------------------------

    \603\ See letter from Claigan.
---------------------------------------------------------------------------

    Although commenters on the Proposing Release did not address
whether compliance costs have been overstated, commenters on the 2010
Proposing Release expressed that view.\604\ One commenter stated that
most issuers already have internal systems in place for recording
payments that would be required to be disclosed under Section 13(q) and
that many issuers currently are subject to reporting requirements at a
project level.\605\

Another commenter anticipated that, while the rules would likely result
in additional costs to resource extraction issuers, such costs would be
marginal in scale because, in the commenter's experience, many issuers
already have extensive systems in place to handle their current
reporting requirements and any adjustments needed as a result of
Section 13(q) could be done in a timely and cost-effective manner.\606\
Another commenter believed that issuers could adapt their current
systems in a cost-effective manner because they should be able to adapt
a practice undertaken in one operating environment to those in other
countries without substantial changes to the existing systems and
processes of an efficiently-run enterprise.\607\
---------------------------------------------------------------------------

    \604\ See letters from ERI 2 (pre-proposal); Oxfam 1 (pre-
proposal); PWYP 1 (pre-proposal); and RWI 1 (pre-proposal).
    \605\ See letter from RWI 1 (pre-proposal) (noting that
Indonesia requires reporting at the production sharing agreement
level and that companies operating on U.S. federal lands report
royalties paid by lease).
    \606\ See letter from Hermes (pre-proposal).
    \607\ See letter from RWI 1 (pre-proposal).
---------------------------------------------------------------------------

    Another commenter stated that, in addition to issuers already
collecting the majority of information required to be made public under
Section 13(q) for internal record-keeping and audits, U.S. issuers
already report such information to tax authorities at the lease and
license level.\608\ This commenter added that efficiently-run issuers
should not have to make extensive changes to their existing systems and
processes to export practices undertaken in one operating environment
to another.\609\ However, another commenter disagreed that issuers
already report the payment information required by Section 13(q) for
tax purposes.\610\ This commenter also noted that tax reporting and
payment periods may differ.
---------------------------------------------------------------------------

    \608\ See letter from PWYP 1 (pre-proposal).
    \609\ See id. (citing statement made by Calvert Investments at a
June 2010 IASB-sponsored roundtable).
    \610\ See letter from Rio Tinto (pre-proposal) (``[t]his is a
simplistic view, and the problem is that tax payments for a specific
year are not necessarily based on the actual accounting results for
that year.'').
---------------------------------------------------------------------------

    One commenter, while not providing competing estimates, questioned
the accuracy of the assertions relating to costs from industry
participants,\611\ noting that: (i) Some issuers already report
project-level payments in certain countries in one form or another and
under a variety of regimes; (ii) some EITI countries are already moving
toward project-level disclosure; and (iii) it is unclear whether
issuers can save much time or money by reporting government payments at
the material project or country level.\612\
---------------------------------------------------------------------------

    \611\ See letter from ERI 2 (pre-proposal).
    \612\ This commenter also explained that any costs would be
limited because, among other things, issuers are already required to
keep records of their subsidiaries' payments to governments under
the Foreign Corrupt Practices Act. Id.
---------------------------------------------------------------------------

b. Quantitative Estimates of Compliance Costs
    In the Proposing Release, we presented a quantitative estimate of
the compliance costs associated with the proposed rules. No commenters
specifically addressed this quantitative estimate or provided
additional data that we could use to update or refine this estimate.
Because we have not received quantitative estimates using the same or
similar approaches that take into account the differences between the
rules proposed in 2010 and those proposed in the Proposing Release, we
use the approach presented in the Proposing Release and the
quantitative information supplied by commenters in response to the 2010
Proposing Release to assess the initial and ongoing compliance costs of
the final rules.\613\ We supplement and compare this analysis with the
cost estimate supplied by one commenter that used a different
approach.\614\ Our general approach is to estimate the upper and lower
bounds of the compliance costs for each potentially affected issuer and
then to sum up these estimates to estimate the aggregate compliance
costs.\615\ As discussed in Section III.A above, we estimate that, as
of the end of 2015, 755 issuers would be potentially affected by the
final rules.\616\ However, in determining which issuers are likely to
bear the full costs of compliance with the final rules, we make two
adjustments to the list of affected issuers. First, we exclude those
issuers that will be subject to disclosure requirements in foreign
jurisdictions that are substantially similar to the final rules and
therefore will likely already be bearing compliance costs for such
disclosure. Second, we exclude small issuers that likely could not have
made any payment above the de minimis amount of $100,000 to any
government entity in 2015.
---------------------------------------------------------------------------

    \613\ See letters from Barrick Gold (pre-proposal), ExxonMobil 1
(pre-proposal), and Rio Tinto (pre-proposal) discussed above in
Section III.B.2.a. One commenter also provided estimates of initial
compliance hours that are similar to Barrick Gold. See letter from
NMA 2 (pre-proposal). We are unaware of reliable data that would
allow us to estimate the impact of changed provisions, (e.g., the
change in the definition of the term ``control'').
    \614\ See letter from Claigan discussed above. This commenter's
cost estimates are largely consistent with our estimates.
    \615\ There may be some uncertainty surrounding who will
ultimately bear the compliance costs. Depending on market conditions
and the degree of competition, issuers may attempt to pass some or
all of their costs on to other market participants. This
consideration, however, does not change our estimates.
    \616\ We acknowledge that, as one commenter suggested, some of
these issuers are affiliated and thus are likely to share compliance
systems and fixed costs of creating such systems. See letter from
Publish What You Pay United States (Nov. 12, 2015) (``PWYP-US 2
(pre-proposal)''). Due to difficulties in determining affiliation
status, however, we have not attempted to eliminate these issuers
from our estimates, and therefore our estimates may overstate the
potential costs. Nevertheless, this potential overstatement of costs
would not apply in one of the cases we consider below, the case of
no fixed costs, because the costs would depend only on the total
assets of affected issuers, not on the number of them.
---------------------------------------------------------------------------

    To address the first consideration, we searched the filed annual
forms and forms' metadata for issuers that have a business address, are
incorporated, or are listed on markets in the EEA or Canada. For
purposes of our analysis, we assume that those issuers will already be
subject to similar resource extraction payment disclosure rules in
those jurisdictions by the time the final rules become effective and,
thus, that the additional costs to comply with the final rules will be
much lower than costs for other issuers.\617\ We identified 192 such
issuers.\618\
---------------------------------------------------------------------------

    \617\ We assume that an issuer will be subject to the EEA or
Canadian rules if it is listed on a stock exchange located in one of
these jurisdictions or if it has a business address or is
incorporated in the EEA or Canada and its total assets are greater
than $50 million. The latter criteria is a proxy for multipronged
eligibility criteria underlying both EEA and Canadian rules that
include issuer assets, revenues, and the number of employees.
    \618\ We are adopting an alternative reporting option as part of
the final rules and recognizing the disclosure requirements of these
jurisdictions to be substantially similar to our rules. Thus, for
these issuers, the additional cost will be negligible compared to
the compliance costs we consider in this section. See also Section
III.C.2 below.
---------------------------------------------------------------------------

    Second, among the remaining 563 issuers (i.e., 755 minus 192) we
searched for issuers that, in the most recent fiscal year as of the
date of their Exchange Act annual report filing, reported that they are
shell companies, and, thus, have no or only nominal operations, or have
both revenues and absolute value net cash flows from investing
activities of less than the de minimis payment threshold of $100,000.
Under those financial constraints, such issuers are unlikely to have
made any non-de minimis and otherwise reportable payments to
governments and therefore are unlikely to be subject to the adopted
reporting requirements. We identified 138 such issuers.
    Taking these estimates of the number of excluded issuers together,
we estimate that approximately 425 issuers (i.e., 755 minus 192 minus
138) would bear the full costs of compliance with the final rules.\619\
---------------------------------------------------------------------------

    \619\ Because it may be uncertain at the beginning of a
financial period as to whether payments from an issuer will exceed
the de minimis threshold by the end of such period, an excluded
issuer may incur costs to collect the information to be reported
under the final rules even if that issuer is not subsequently
required to file an annual report on Form SD. To the extent that
excluded issuers incur such costs, our estimate may understate the
aggregate compliance costs associated with the final rules.

---------------------------------------------------------------------------

    To establish an upper and lower bound for the initial compliance
costs estimates, we use the initial compliance cost estimates from
Barrick Gold and ExxonMobil referenced above. We note, however, that
these cost estimates were provided by the commenters during the comment
period after the 2010 Proposing Release and were based on policy
choices made in that proposal and reflected the other international
regulatory regimes in place at that time.\620\ Since then we have
changed our approach (e.g., the final rules define the term ``control''
based on accounting principles, which we believe will be easier and
less costly for issuers to apply) \621\ and international reporting
regimes have undergone considerable development.\622\ These
developments are likely to significantly lower the compliance costs
associated with the final rules. However, as noted above, we have not
received comment letters with reliable quantitative assessments of the
extent to which these changes would reduce commenters' cost estimates
and, thus, we use the original commenters' estimates without
adjustment.
---------------------------------------------------------------------------

    \620\ We note, in particular, that Barrick Gold is incorporated
in Canada and listed on the Toronto Stock Exchange and thus is
subject to substantially similar foreign disclosure requirements
under existing international transparency regimes.
    \621\ See Section II.D of the Proposing Release.
    \622\ In this regard, we note that some affected issuers, even
if they are not subject to foreign disclosure requirements, might
have subsidiaries or other entities under their control that are
subject to such requirements. These issuers will thus face lower
compliance costs because they will already have incurred some of
these costs through such subsidiaries and other controlled entities.
---------------------------------------------------------------------------

    Our methodology to estimate initial compliance costs applies the
specific issuer cost estimates from Barrick Gold and ExxonMobil,
$500,000 and $50,000,000, respectively,\623\ to the average issuer and
then multiplies the costs by the number of affected issuers. However,
because Barrick Gold and ExxonMobil are very large issuers and their
compliance costs may not be representative of significantly smaller
issuers, we apply these costs to all potentially affected issuers as a
percentage of total assets. This allows for the compliance cost
estimate for each potentially affected issuer to vary by their size,
consistent with our expectation that larger issuers will face higher
compliance costs. For example, we expect larger, multinational issuers
to need more complex payment tracking systems compared to smaller,
single country based issuers. This approach is consistent with the
method used in the 2012 Adopting Release, where we estimated the
initial compliance costs to be between 0.002% and 0.021% of total
assets.\624\
---------------------------------------------------------------------------

    \623\ Barrick Gold estimated that it would require 500 hours for
initial changes to internal books and records and processes and 500
hours for ongoing compliance costs. At an hourly rate of $400, this
amounts to $400,000 (1,000 hours * $400) for hourly compliance
costs. Barrick Gold also estimated that it would cost $100,000 for
initial IT/consulting and travel costs, for a total initial
compliance cost of $500,000. A similar analysis by ExxonMobil
estimated their initial compliance costs to be $50 million. See 2012
Adopting Release, Section III.D for details.
    \624\ See 2012 Adopting Release at Section III.D for details
(the approach we use here is referred to as Method 1 in that
release). In the 2012 Adopting Release, we also used another method
(referred to as Method 2) to estimate compliance costs. With Method
2, we first estimated the compliance costs for small and large
issuers (as determined by market capitalization) using the same
assumptions as in Method 1 that compliance costs are a constant
fraction of issuer's total assets (i.e., that all costs are variable
and there is no fixed component to the costs) and then aggregated
the compliance costs for all issuers. Although this approach was
intended to provide limited insight into any differential cost
impacts on small versus large issuers, it did not separate fixed and
variable cost components of the total compliance costs. Therefore,
it did not allow us to apply a differential cost structure to small
and large issuers. In addition, because of poor data availability
and data quality on market capitalization for small and foreign
issuers, the Method 2 approach may yield less accurate estimates
than the approach we use in this release (on the other hand, Method
1 could be properly applied because we collected total assets data
for all affected issuers). As a consequence, we now believe that the
disaggregation and subsequent aggregation of small and large issuer
cost estimates does not provide additional insights into the
difference in cost structure for small versus large issuers and any
effects of this difference on the aggregate costs. Consequently, we
have used only one estimation approach in this analysis. As
discussed below, however, we do believe that there is a fixed
component to the compliance costs which could potentially have a
differential impact on small issuers, and we have expanded the
Method 1 approach to allow for a fixed costs component in the cost
structure. We requested comments about the breakdown of the
compliance costs into the fixed and variable components to enable us
to estimate such impact better, but we have not received any
comments quantifying such breakdown.
---------------------------------------------------------------------------

    We calculate the average total assets of the 425 potentially
affected issuers to be approximately $6.4 billion.\625\ Applying the
ratio of initial compliance costs to total assets (0.002%) from Barrick
Gold, we estimate the lower bound of total initial compliance costs for
all issuers to be $54.73 million (0.002% * $6,439,369,000 * 425).
Applying the ratio of initial compliance costs to total assets (0.021%)
from ExxonMobil, we estimate the upper bound of total initial
compliance costs for all issuers to be $574.7 million (0.021% *
$6,439,369,000 * 425). The table below summarizes the upper and lower
bound of total initial compliance costs under the assumption that
compliance costs vary according to the issuer's size.
---------------------------------------------------------------------------

    \625\ For the 425 potentially affected issuers, we collected
their total assets for the fiscal year that corresponds to their
Exchange Act annual reports for 2015 from XBRL exhibits that
accompany issuers' annual reports on EDGAR and from Compustat. If
these two data sources varied on an issuer's total assets, we used
the higher of the two values. For the remaining issuers that do not
have total assets data from either of these two data sources, we
manually collected the data on total assets from their filings. We
then calculated the average of those total assets across all issuers
that have the data.

------------------------------------------------------------------------

------------------------------------------------------------------------
    Average issuer initial compliance costs            Calculation
            assuming no fixed costs
------------------------------------------------------------------------
Average 2015 total assets of     $6,439,369,000  .......................
 all affected issuers.......
Average initial compliance              128,787    $6,439,369,000*0.002%
 costs per issuer using
 Barrick Gold percentage of
 total assets (lower bound).
Total initial compliance             54,734,640              128,787*425
 costs using Barrick Gold
 (lower bound)..............
Average initial compliance            1,352,268     6,439,369,000*0.021%
 costs per issuer using
 ExxonMobil's percentage of
 total assets (upper bound).
Total initial compliance            574,713,700            1,352,268*425
 costs using ExxonMobil
 (upper bound)..............
------------------------------------------------------------------------

    We also recognize that it is possible that some compliance costs
may not scale by issuer size and as a result smaller issuers may be
subject to certain fixed costs that do not vary with the size of the
issuers' operations. While commenters did not provide any information
on what fraction of the initial compliance costs would be fixed versus
variable, we assume that fixed costs are equal to $500,000--the lower
of the two compliance cost estimates provided by commenters.\626\ To
find the

lower and upper bound estimates of compliance costs in this case, we
assume that each issuer's costs are the maximum between the fixed costs
of $500,000 and, respectively, the lower bound (0.002% of total assets)
or the upper bound (0.021% of total assets) of the variable costs.
Applying these lower and upper bounds to each issuer and summing across
all issuers, we find that the lower bound estimate is $239 million (or,
on average, $0.56 million per issuer) and the upper bound estimate is
$700 million (or, on average, $1.65 million per issuer).
---------------------------------------------------------------------------

    \626\ Assuming that both estimates are accurate, the fixed costs
cannot be higher than the lower of the two estimates. We have chosen
to use the highest possible value of fixed costs satisfying this
restriction to encompass the widest range of cost estimates. We have
not received any comment letters with estimates of the fixed cost
component of the initial compliance costs or addressing the
estimates presented in the Proposing Release.
---------------------------------------------------------------------------

    The table below summarizes the upper and lower bound of total
initial compliance costs under two fixed costs assumptions.\627\ We
note that our upper bound estimates are consistent with two commenters'
qualitative estimates of initial implementation costs \628\ and the
initial costs estimate from another commenter \629\ is within our range
for the no-fixed costs case. We also note that, if the actual fixed
costs component is between $0 and $500,000, the lower and upper bounds
of compliance costs estimates would be between our estimates for the
two opposite cases.
---------------------------------------------------------------------------

    \627\ The total estimated compliance cost for PRA purposes is
$79,302,480. See Section IV below. The compliance costs for PRA
purposes are encompassed in the total estimated compliance costs for
issuers. As discussed in detail below, our PRA estimate includes
costs related to tracking and collecting information about different
types of payments across projects, governments, countries,
subsidiaries, and other controlled entities. The estimated costs for
PRA purposes are calculated by treating compliance costs as fixed
costs and by only monetizing costs associated with outside
professional services. Therefore, despite using similar inputs for
calculating these costs, the PRA estimate differs from the lower and
upper bounds calculated above.
    \628\ See letters from API 1 (pre-proposal) (``Total industry
costs just for the initial implementation could amount to hundreds
of millions of dollars even assuming a favorable final decision on
audit requirements and reasonable application of accepted
materiality concepts.'') and ExxonMobil 1 (pre-proposal).
    \629\ See letter from Claigan (estimating of the total initial
compliance costs as $181,347,000).

----------------------------------------------------------------------------------------------------------------
                                                     Initial compliance costs        Initial compliance costs
                                                      assuming no fixed costs         assuming fixed costs of
                                                 --------------------------------            $500,000
                                                                                -------------------------------
                                                   Costs for an     Total costs    Costs for an
                                                  average issuer                  average issuer    Total costs
----------------------------------------------------------------------------------------------------------------
Lower bound.....................................        $128,787     $54,734,640        $561,932    $238,820,900
Upper bound.....................................       1,352,268      74,713,700       1,547,437     700,160,800
----------------------------------------------------------------------------------------------------------------

    We acknowledge significant limitations on our analysis that may
result in the actual costs being significantly lower. First, the
analysis is limited to two large issuers' estimates from two different
industries, mining and oil and gas, and the estimates may not
accurately reflect the initial compliance costs of all affected
issuers. Second, the commenters' estimates were generated based on our
initial proposal and they do not reflect the final rules or the
international transparency regimes that subsequently have been adopted
by other jurisdictions.\630\
---------------------------------------------------------------------------

    \630\ See, e.g., Section II.D and note 622 and accompanying
text.
---------------------------------------------------------------------------

    We also acknowledge certain limitations on our analysis that could
potentially cause the cost to be higher than our estimates. First, we
assume that the variable part of the compliance costs is a constant
fraction of total assets, but the dependence of costs on issuer size
might not be linear (e.g., costs could grow disproportionally faster
than issuer assets). Second, commenters mentioned other potential
compliance costs not necessarily captured in this discussion of
compliance costs.\631\
---------------------------------------------------------------------------

    \631\ Those could include, for example, costs associated with
the termination of existing agreements in countries with laws that
prohibit the type of disclosure mandated by the final rules, costs
of decreased ability to bid for projects in such countries in the
future, or costs of decreased competitiveness with respect to non-
reporting entities. Commenters generally did not provide estimates
of such costs. As discussed further below, we have attempted to
estimate the costs associated with potential foreign law
prohibitions on providing the required disclosure.
---------------------------------------------------------------------------

    In spite of these limitations, we consider our quantitative
approach to estimate compliance costs to be appropriate and supported
by the limited data we have. During the comment period after the
Proposing Release, no commenters specifically critiqued this method or
the derived quantitative estimates or provided additional data that we
could use to update or refine these estimates. Only one commenter
supplied an alternative approach and its point estimates are within the
range of our estimates for both initial and ongoing direct compliance
costs.\632\
---------------------------------------------------------------------------

    \632\ See letter from Claigan and notes 629 above and 636 below.
This commenter's approach was not critiqued or refined by other
commenters during the extended comment rebuttal period.
---------------------------------------------------------------------------

    We estimate ongoing compliance costs using the same method under
the assumptions of no fixed costs and fixed costs of $200,000 per year
(as explained below). In response to the 2010 Proposing Release, we
received quantitative information from three commenters--Rio Tinto,
National Mining Association, and Barrick Gold--that we used in the
analysis.\633\ As in the 2012 Adopting Release, we use these three
comments to estimate the ongoing compliance costs as a percentage of
total assets to be 0.003%, 0.02%, and 0.0008%, respectively, and the
average ongoing compliance costs to be 0.0079% of total assets.\634\
For the no fixed costs

case, we take the average total assets for all affected issuers,
$6,439,369,000, and multiply it by a constant fraction (either the
lower bound of 0.0008%, the average of 0.0079%, or the upper bound of
0.02%) of total assets and the number of affected companies (425) to
get the total lower bound, the average, and the upper bound of the
annual ongoing compliance costs estimates.
---------------------------------------------------------------------------

    \633\ See letters from Barrick Gold (pre-proposal); Rio Tinto
(pre-proposal); and NMA 2 (pre-proposal). We apply the same caveat
as in the initial compliance cost estimates above, namely, that
these cost estimates were provided by the commenters during the
comment period after the 2010 Proposing Release and were based on
policy choices made in that proposal. Discretionary choices
reflected in the final rules and recent international developments
could significantly lower the cost estimates. We also note that both
Barrick Gold (incorporated in Canada and listed on the Toronto Stock
Exchange) and Rio Tinto (incorporated in the United Kingdom and
listed on the London Stock Exchange) are subject to substantially
similar disclosure requirements under existing international
transparency regimes.
    \634\ We estimate the cost percentages as follows: Rio Tinto
estimated that it would take between 5,000 and 10,000 hours per year
to comply with the requirements, for a total ongoing compliance cost
of between $2 million (5,000*$400) and $4 million (10,000*$400). We
use the midpoint of their estimate, $3 million, as their expected
ongoing compliance cost. The National Mining Association (NMA),
which represents the mining industry, estimated that ongoing
compliance costs would be 10 times our initial estimate from the
2010 Proposing Release, although it did not state specifically the
number to which it referred. We believe NMA was referring to our
proposed estimate of $30,000. Although this is the dollar figure for
total costs, NMA referred to it when providing an estimate of
ongoing costs, so we do the same here, which would result in
$300,000 (10*$30,000). Finally, Barrick Gold estimated that it would
take 500 hours per year to comply with the requirements, or $200,000
(500*$400) per year. As with the initial compliance costs, we
calculate the ongoing compliance cost as a percentage of total
assets. Rio Tinto's total assets as of the end of fiscal year 2009
were approximately $97 billion and their estimated ongoing
compliance costs as a percentage of assets is 0.003% ($3,000,000/
$97,236,000,000). We calculated the average total assets of the
mining industry to be $1.5 billion, and using NMA's estimated
ongoing compliance costs, we estimate ongoing compliance costs as a
percentage of assets to be 0.02% ($300,000/$1,515,000,000). Barrick
Gold's total assets as of the end of fiscal year 2009 were
approximately $25 billion and their estimated ongoing compliance
costs as a percentage of assets is 0.0008% ($200,000/
$25,075,000,000). See 2012 Adopting Release at Section III.D for
details.
---------------------------------------------------------------------------

    Similar to our estimates of the initial costs, we then consider
fixed costs equal to the lowest of three estimates given by the
commenters, the Barrick Gold estimate of $200,000 per year.\635\ To
find the lower and upper bound estimates, we assume that each issuer's
costs are the maximum between the fixed costs of $200,000 and either
the lower bound (0.0008% of total assets) or the upper bound (0.02% of
total assets) of the variable costs, respectively. Applying these lower
and upper bounds to each issuer and summing across all issuers, we find
that the lower bound estimate is $96 million per year (or, on average,
$0.22 million per issuer per year) and the upper bound estimate is $591
million per year (or, on average, $1.39 million per issuer per year).
Our estimates are summarized in the following table. We note that the
ongoing costs estimate from one commenter \636\ is within our range of
the no-fixed costs case. We also note that, if the actual fixed costs
component is between $0 and $200,000, the lower and upper bounds of
compliance costs estimates would be between our lower and upper bounds
estimates for the two opposite fixed costs cases.
---------------------------------------------------------------------------

    \635\ Similarly to the initial compliance costs, assuming that
both estimates are accurate, the fixed costs cannot be higher than
the lowest of the estimates. We have chosen to use the highest
possible value of fixed costs satisfying this restriction to
encompass the widest range of cost estimates. We have not received
any comment letters with estimates of the fixed cost component of
the ongoing compliance costs or addressing the estimates presented
in the Proposing Release.
    \636\ See letter from Claigan (estimating the total ongoing
compliance costs as $73,747,875).

----------------------------------------------------------------------------------------------------------------
                                       Annual ongoing compliance       Annual ongoing compliance
                                     costs under the assumption of   costs under the assumption of
                                            no fixed costs              fixed costs of $200,000
                                   ---------------------------------------------------------------
                                     Costs for an                    Costs for an
                                    average issuer    Total costs   average issuer    Total costs
--------------------------------------------------------------------------------------------------
Lower bound.......................         $51,515     $21,893,860        $224,773     $95,528,370
Average...........................         508,710     216,201,800         628,380     267,061,300
Upper bound.......................       1,287,874     547,346,400       1,389,882     590,699,900
----------------------------------------------------------------------------------------------------------------

    As noted above, we expect that the initial and ongoing compliance
costs associated with the final rules are likely to be greater for
larger, multinational issuers as compared to smaller, single country
based issuers, as larger issuers would likely need more complex systems
to track and report the required information. However, to the extent
there is a significant fixed component to the final rules' overall
compliance costs, such costs could be disproportionately burdensome for
smaller reporting companies. In this case, the final rules could give
rise to competitive disadvantages for these smaller issuers and could
provide incentive for these issuers to consider exiting public capital
markets to avoid reporting requirements (possibly incurring a higher
cost of capital and potentially limited access to capital in the
future). We estimate that approximately 43% of affected issuers are
smaller reporting companies.\637\ Nevertheless, given the fact that
smaller issuers constitute a significant portion of the public
reporting companies making resource extraction payments, exempting
these issuers from the final rules could significantly diminish the
expected benefits of the required disclosure.
---------------------------------------------------------------------------

    \637\ As discussed in this section above, our estimate of the
number of affected issuers already excludes 138 issuers that are
shell companies or whose reported revenues and net cash flows from
investing activities suggest that they are unlikely to make payments
above the de minimis threshold. If we apply a significantly higher
threshold ($250,000, $500,000, $750,000, or $1,000,000) to revenues
and cash flows from investing to estimate the number of such
issuers, we would exclude a slightly higher number of issuers from
our cost estimates (162, 176, 191, or 203, respectively).
Nonetheless, for the reasons described above, we believe that we
have set the de minimis threshold at an appropriate level. See also
Section II.C above and Section II.C.2 of the Proposing Release.
---------------------------------------------------------------------------

c. Indirect Costs and Competitive Effects

    In addition to direct compliance costs, we anticipate that the
statutory reporting requirements could result in significant indirect
effects. Issuers that have a reporting obligation under Section 13(q)
could be at a competitive disadvantage compared to private companies
and foreign companies that are not subject to the reporting
requirements of the U.S. federal securities laws and therefore do not
have such an obligation. For example, such competitive disadvantage
could result from, among other things, any preference by the government
of the host country to avoid disclosure of covered payment information,
or any ability of market participants to use the information disclosed
by reporting issuers to derive contract terms, reserve data, or other
confidential information. The Commission lacks sufficient data or a
sufficiently reliable methodology to compare quantitatively total
benefits against total costs, and no commenter has provided us with
data regarding competitive effects or suggested a methodology that
would allow us to engage in an empirical evaluation.
    Industry commenters on the 2010 Proposing Release stated that
confidential production and reserve data can be derived by competitors
or other interested persons with industry knowledge by extrapolating
from the payment information required to be disclosed.\638\ Other
commenters asserted, however, that such extrapolation is not possible
or that such information is readily available from certain commercial
databases. These commenters stated that information of the type
required to be disclosed by Section 13(q) therefore would not confer a
competitive advantage on industry participants not subject to such
disclosure requirements.\639\ Another commenter

prior to the Proposing Release expressed the view that project level
reporting will not disclose confidential information of affected
issuers or result in competitive disadvantage for such issuers relative
to either owners of natural resources or to competitive resource
producers, including state enterprises, who would be otherwise
unencumbered by such reporting requirements.\640\ Commenters on the
Proposing Release were also split in their opinion on the competitive
effect of payment information disclosure, asserting views similar to
those described above.\641\ Whatever the effect, any competitive impact
arising from Section 13(q)'s mandated disclosures should be minimal in
those jurisdictions in which payment information of the types covered
by Section 13(q) is already publicly available.\642\ In addition, any
competitive impact should be substantially reduced to the extent that
other jurisdictions, such as the European Union and Canada, have
adopted laws that require disclosure similar to the disclosure required
by Section 13(q) and the final rules.\643\ We note, however, that if
commenters are accurate in their assessment of the competitive effects
arising from such disclosure requirements, some U.S. issuers that are
not subject to the EU Directives or other international disclosure
regimes might lose some of the competitive advantage they otherwise
would enjoy from not being obligated to disclose their resource
extraction payments.
---------------------------------------------------------------------------

    \638\ See letters from API 1 (pre-proposal); ExxonMobil 1 (pre-
proposal); and RDS 2 (pre-proposal).
    \639\ See letters from PWYP 1 (pre-proposal) and Oxfam 1 (pre-
proposal).
    \640\ See letter from Conrad (pre-proposal).
    \641\ See letters from API 1, ExxonMobil 1, PWYP-US 1, Oxfam 1.
    \642\ In this regard, we note that one commenter provided
several examples of countries in which payments are publicly
disclosed on a lease or concession level. See letter from PWYP 3.
    \643\ One commenter suggested that if both the United States and
European Union implement disclosure requirements regarding payments
to governments ``around 90% of the world's extractive companies will
be covered by the rules.'' See letter from Arlene McCarthy (Aug. 10,
2012) (Ms. McCarthy is a member of the European Parliament and the
parliamentary draftsperson on the EU transparency rules for the
extractive sector).
---------------------------------------------------------------------------

    To the extent that the requirement to disclose payment information
does impose a competitive disadvantage on an issuer, the issuer could
be motivated to sell assets affected by such competitive disadvantage
at a price that does not fully reflect the value of such assets absent
such competitive impact.\644\ One commenter on the 2010 Proposing
Release stated that tens of billions of dollars of capital investments
could potentially be put at risk if issuers were required to disclose,
pursuant to the final rules, information prohibited by a host country's
laws or regulations.\645\ Additionally, according to commenters,
resource extraction issuers operating in countries that prohibit, or
could in the future prohibit, the disclosure required under the
proposed rules could bear substantial costs.\646\ As discussed below,
commenters have presented conflicting positions and representations
concerning the prevalence and scope of such foreign law prohibitions,
with some commenters on the Proposing Release observing that issuers
filing in certain foreign jurisdictions are providing payment
disclosure in respect of countries that allegedly prohibit
disclosure.\647\ In the event that such foreign law prohibitions exist,
or are adopted in the future, pursuant to our existing Exchange Act
authority, we will consider requests for exemptive relief on a case-by-
case basis and may grant such relief, if and when warranted. The
economic implications of providing or not providing such relief are
discussed below in Section III.C.1.
---------------------------------------------------------------------------

    \644\ For example, a study on divestitures of assets find that
issuers that undertake voluntary divestitures have positive stock
price reactions, but also finds that issuers forced to divest assets
due to action undertaken by the antitrust authorities suffer a
decrease in shareholder value. See Kenneth J. Boudreaux,
``Divestiture and Share Price.'' Journal of Financial and
Quantitative Analysis 10 (Sept. 1975), 619-26. See also, G. Hite and
J. Owers. ``Security Price Reactions around Corporate Spin-Off
Announcements.'' Journal of Financial Economics 12 (Dec. 1983), 409-
36 (finding that issuers spinning off assets because of legal/
regulatory difficulties experience negative stock returns).
    \645\ See letter from RDS 4 (pre-proposal).
    \646\ See Section II.I.2 above.
    \647\ See notes 379 and 402 above.
---------------------------------------------------------------------------

    Addressing other potential costs, one commenter on the 2010
Proposing Release referred to a potential economic loss borne by
shareholders, without quantifying such loss, which the commenter
believed could result from highly disaggregated public disclosure of
competitively sensitive information causing competitive harm.\648\ The
commenter also noted resource extraction issuers could suffer
competitive harm because they could be excluded from many future
projects altogether. The same commenter also noted that because energy
underlies every aspect of the economy, these negative impacts could
potentially have repercussions well beyond resource extraction
issuers.\649\
---------------------------------------------------------------------------

    \648\ See letter from API 1 (pre-proposal).
    \649\ See id.
---------------------------------------------------------------------------

    Some commenters on the 2010 Proposing Release suggested that we
permit issuers to submit payment data confidentially to the Commission
and make public only an aggregated compilation of the information.\650\
The commenters suggesting that the Commission make public only a
compilation of information stated that such an approach would address
many of their concerns about the disclosure of commercially sensitive
or legally prohibited information and would significantly mitigate the
costs of the mandatory disclosure under Section 13(q). One commenter on
the Proposing Release made a similar suggestion.\651\ As noted above,
we did not permit confidential submissions in the 2012 Rules, and the
current final rules are generally consistent with that approach. As a
result, the final rules require public disclosure of the payment
information. We note that in situations involving more than one
payment, the information would be aggregated by payment type,
government, and/or project, which may limit the ability of competitors
to use the publicly disclosed information to their advantage. Also, a
company can combine more than one contract into a project, which may
further limit the ability of competitors to use the information.
Further, we are providing a limited exemption for payments in
connection with exploratory activities, which should further reduce the
potential competitive effects that might result from disclosure of
payment information.\652\ For other situations of potential substantial
competitive harm, we will consider applications for exemptive relief
from the proposed disclosure requirements on a case-by-case basis and
may grant such relief, if and when warranted (similar to our approach
with potential foreign law prohibitions).\653\ In opting to provide a
categorical exemption for new exploratory operations but to rely on
case-by-case exemptive relief for potential competitive harms
associated with ongoing projects, we credit the position advanced by
the API that the payment terms of older contracts are generally
publicly known (even if not technically disclosed).\654\ Consequently,
the disclosure of payment information relating to these projects is
less likely to produce competitive harm than payments relating to, for
example, exploratory activities.
---------------------------------------------------------------------------

    \650\ See Section II.G.2 of the Proposing Release.
    \651\ See letter from API 1.
    \652\ This exemption would not significantly frustrate the
transparency goals of the final rules. An issuer that would rely on
the exemption for its payments made in connection with exploratory
activities would have to disclose such payment information in its
Form SD filing for the fiscal year following the fiscal year in
which the payment was made. See Section II.I.3 for details.
    \653\ See Section II.I above.
    \654\ See API 1.

---------------------------------------------------------------------------

    As noted above, the cost of compliance with this provision would be
primarily borne by the issuer thus potentially diverting capital away
from other productive opportunities and resulting in a loss of
allocative efficiency.\655\ Such effects may be partially offset over
time if increased transparency of resource extraction payments reduces
corrupt practices by governments of resource-rich countries and in turn
helps promote improved economic development and higher economic growth
in those countries. In this regard, as discussed above in Section
III.B.1, a number of economic studies have shown that reducing
corruption can help promote higher economic growth through more private
investments, better deployment of human capital, and political
stability.\656\
---------------------------------------------------------------------------

    \655\ See letter from Chevron. See also letter from Chairman
Bachus and Chairman Miller. As discussed above in note 615, there is
some uncertainty regarding who would bear the ultimate costs of
compliance. Regardless of who bears the majority of the compliance
costs, we believe that the effects on allocative efficiency and
capital flows would likely be similar.
    \656\ See note 561 above and accompanying text.
---------------------------------------------------------------------------

C. Potential Effects Resulting From Specific Implementation Choices

    As discussed in detail in Section II, the Proposing Release
specifically addressed matters identified in the U.S. District Court
for the District of Columbia's decision in the API Lawsuit. In
developing the final rules, in addition to those matters, we have also
considered relevant international developments, input from staff
consultations with other U.S. Government agencies, and the public
comments that we have received. We discuss below the significant
choices that we are making to implement the statute and the associated
benefits and costs of those choices. We are unable to quantify the
impact of each of the choices discussed below with precision because
reliable, empirical evidence about the effects is not readily available
to the Commission and commenters have not provided us with empirical
evidence relating to these various choices.
1. Exemption from Compliance
    Absent potential exemptive relief, resource extraction issuers
operating in countries that prohibit, or may in the future prohibit,
the disclosure required under Section 13(q) could bear substantial
costs.\657\ Such costs could arise if issuers have to choose between
ceasing operations in certain countries or violating local law, or if
the country's laws have the effect of preventing them from
participating in future projects. Some commenters on the 2010 Proposing
Release asserted that four countries have such laws.\658\ Other
commenters disputed the assertion that there are foreign laws that
specifically prohibit disclosure of payment information.\659\ After
reviewing the comment letters on the Proposing Release, we note that
some commenters continue to assert that at least two countries--Qatar
and China--prohibit the required disclosures whereas commenters no
longer assert that two other countries mentioned in earlier comment
letters--Angola and Cameroon--prohibit the disclosure.\660\ Although we
are not making any final determinations at this stage, as discussed
above, we anticipate obtaining more information about companies'
experiences with the disclosures under the EU Directives and ESTMA in
the near term, which should assist the Commission in deciding whether
any type of case-by-case exemptive relief is appropriate before the
first reports are due under the final rules in two years.
---------------------------------------------------------------------------

    \657\ See Section II.I.2 above.
    \658\ See letters from API 1 (pre-proposal) and ExxonMobil 1
(pre-proposal) (mentioning Angola, Cameroon, China, and Qatar). See
also letter from RDS 2 (pre-proposal) (mentioning Cameroon, China,
and Qatar).
    \659\ See notes 379 and 402 above.
    \660\ See letter from API 1.
---------------------------------------------------------------------------

    To the extent that such prohibitions exist and are enforced without
any type of waiver, affected issuers could suffer substantial losses if
they have to terminate their operations and redeploy or dispose of
their assets in the particular foreign jurisdiction. These losses would
be magnified if an issuer cannot redeploy the assets in question
easily, or if it has to sell them at a steep discount (a fire sale).
Even if the assets could be easily redeployed, an issuer could suffer
opportunity costs if they are redeployed to projects with inferior
rates of return. In the 2012 Adopting Release we estimated that such
losses could amount to billions of dollars. One commenter on the
Proposing Release also asserted that such losses could be in the tens
of billions of dollars.\661\
---------------------------------------------------------------------------

    \661\ See letters from ExxonMobil 1 and ExxonMobil 2.
---------------------------------------------------------------------------

    In addition to the costs described above, a foreign private issuer
with operations in a country that prohibits disclosure of covered
payments, or a foreign issuer that is domiciled in such country, might
face different types of costs. For example, in these circumstances, an
issuer might decide it is necessary to delist from an exchange in the
United States, deregister, and cease reporting with the
Commission,\662\ thus incurring a higher cost of capital and
potentially limited access to capital in the future. Based on our
experience with issuers and the securities markets, we believe this is
highly unlikely given that, at least for larger resource extraction
issuers, they generally seek access to capital through publicly-traded
securities markets and many of the major foreign securities exchanges
on which a resource extraction issuer might seek to trade its
securities are now subject to laws that are substantially similar to
the final rules. Nonetheless, we acknowledge that should this occur,
shareholders, including U.S. shareholders, might suffer an economic and
informational loss if an issuer decides it is necessary to deregister
and cease reporting under the Exchange Act in the United States as a
result of the final rules.
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    \662\ See letters from Branden Carl Berns (Dec. 7, 2011)
(``Berns (pre-proposal)'') and API 1.
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    We believe that there are a number of factors that may serve to
diminish the likelihood that, to the extent that there are or will be
foreign laws that prohibit the required disclosures, such laws would be
retained or adopted or, if retained or adopted, may serve to mitigate
the costs and competitive burdens arising from their impact. For
example, the widening global influence of the EITI and the recent trend
of other jurisdictions to promote transparency, including listing
requirements adopted by the Hong Kong Stock Exchange \663\ and the
requirements adopted pursuant to the EU Directives and ESTMA, may
discourage governments in resource-rich countries from retaining or
adopting prohibitions on payment disclosure. Resource extraction
issuers concerned that disclosure required by Section 13(q) may be
prohibited in a given host country may also be able to seek
authorization from the host country to disclose such information.\664\
Commenters did not provide estimates of the cost that might be incurred
to seek such an authorization, and we are unaware of any probative
data.
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    \663\ See Proposing Release, n.70.
    \664\ See letter from Oxfam-ERI (stating that ``Qatar
government's Model Production Sharing Agreement (PSA) contains a
carveout clause allowing a party to disclose any information that
might otherwise be deemed confidential, when required by applicable
laws and regulations. In the absence of express prohibitions on
disclosure, the terms of this contract control confidentiality of
information related to each project''). The legal opinions submitted
by Royal Dutch Shell with its pre-proposal comment letter also
indicate that disclosure of otherwise restricted information may be
authorized by government authorities in Cameroon and China,
respectively. See letter from RDS 2 (pre-proposal).

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    In addition, these potential costs could be substantially mitigated
under the final rules. We intend to consider using our existing
authority under the Exchange Act to provide exemptive relief on a case-
by-case basis, if and when warranted, upon the request of a resource
extraction issuer.\665\ As mentioned above, we believe that a case-by-
case approach to exemptive relief is preferable to either including
within the final rules a blanket exemption where foreign law prohibits
disclosure (or for any other reason) or providing no exemptions and no
avenue for exemptive relief under this or other circumstances. This is
particularly so given the increasing uncertainty about the existence
and scope of such laws and the likelihood that the Commission will have
a more informed basis to assess the need for exemptive relief as more
companies begin to report under the EU Directives and ESTMA. The final
approach should significantly decrease compliance and economic costs to
the extent that issuers are able to demonstrate that an exemption where
host country laws prohibit disclosure is warranted. Indeed, assuming
such laws exist and that the Commission determines to grant an
exemption from the final rules, this approach could potentially save
affected issuers billions of dollars in compliance and economic
costs.\666\
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    \665\ See discussion in Section II.I above.
    \666\ We note, however, that in addition to reducing costs,
granting an exemption might diminish some of the benefits of
enhanced transparency as well.
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    An alternative to using our exemptive authority on a case-by-case
basis would be to provide an exemption where specific countries have a
law prohibiting the required disclosure. Although a blanket exemption
could reduce potential economic costs (e.g., costs of relocating
assets) and compliance costs (e.g., costs associated with applying for
the exemption) for issuers if they are subject to foreign law
prohibitions on disclosure, it could create a stronger incentive for
host countries that want to prevent transparency to pass laws that
prohibit such disclosure, potentially undermining the purpose of
Section 13(q) to compel disclosure in foreign countries that have
failed to voluntarily do so.\667\ It also would remove any incentive
for issuers to diligently negotiate with host countries for permission
to make the required disclosures. Furthermore, it would make it more
difficult to address any material changes over time in the laws of the
relevant foreign countries, thereby resulting in an outdated blanket
exemption. By contrast, the tailored case-by-case consideration of
exemptions we intend to pursue will provide a more flexible and
targeted mechanism for the Commission to address potential cost
concerns while minimizing incentives for host countries to enact laws
prohibiting disclosure.\668\
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    \667\ See, e.g., 156 Cong. Rec. S3815 (May 17, 2010) (Statement
of Senator Cardin) (``We currently have a voluntary international
standard for promoting transparency. . . . But too many countries
and too many companies remain outside this voluntary system.''). A
blanket exemption would incentivize host countries that want to
prevent transparency to enact laws prohibiting the disclosure
without suffering the cost of decreasing the number of potential
bidders on--and competition for--projects within their
jurisdictions, and thus without the cost of decreasing the potential
value realized to the host country from awarding a contract. We note
that one commenter on the Proposing Release stated that we had
failed to explain why a case-by-case exemptive approach would not
create the very same incentives. See letter from API 1. We think
this is unlikely, and the incentives to adopt such laws would be
mitigated for the following reasons: a host country government would
realize that there is greater uncertainty in exemption application
approval; any exemptive relief granted under a case-by-case approach
may be time limited or otherwise tailored, unlike a blanket
exemption; and countries may realize that by adopting such a law,
they are reducing the pool of potential competitors for in-country
projects, as issuers may be reluctant to bid for contracts in
countries that prohibit disclosure, if they do not know upfront that
they will be granted an exemption. Thus, enacting laws prohibiting
disclosure could reduce the number of potential bidders on resource
extraction projects within host countries jurisdictions and, due to
possible costs and uncertainty of the exemption application, the
bids on such projects would be lower.
    \668\ Although not providing a blanket exemption could
potentially discourage some companies from listing on U.S.
exchanges, the advantage to these companies from being outside of
the final rules may be limited by the lack of exemptions under the
EU Directives and ESTMA and the possibility that other jurisdictions
in the future will adopt similar initiatives as the global focus on
reducing corruption associated with resource extraction activities
continues.
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    As discussed above, host country laws that prohibit the type of
disclosure required under the final rules could lead to significant
additional economic costs that are not captured by the compliance cost
estimates in Section III.B.2.b. We believe that considering exemptive
relief from the disclosure requirements on a case-by-case basis, as
circumstances warrant, may substantially mitigate such costs. However,
we acknowledge that, if this relief is not provided, issuers could
potentially incur costs associated with the conflict between our
requirements and those foreign law prohibitions. Below, we have
attempted, to the extent possible, to assess the magnitude of the
potential costs if such laws exist and if exemptive relief is not
granted. Although we discuss the potential costs below for
completeness, it is not clear that these costs, in fact, will be
incurred by issuers in light of the present uncertainty regarding the
existence and scope of such foreign laws and the fact that we intend to
consider the use of our exemptive authority where investor interests
would be jeopardized with little accompanying benefit from the specific
disclosure.\669\ Accordingly, the magnitude of the potential costs
outlined below should not be viewed as necessarily indicative of the
likely or expected costs of this aspect of the final rules.
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    \669\ No commenters provided us with data or analysis to assist
in assessing the potential costs that could arise from foreign law
prohibitions on disclosure. We note that we anticipate considering
the specific potential costs that an issuer would experience if a
foreign law prohibition exists when we consider the issuer's
exemptive application, provided the issuer produces documentation to
credibly support those potential costs.
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    We base our analysis on the two countries that some commenters
continue to assert have versions of such laws.\670\ We searched
(through a text search in the EDGAR system) the Forms 10-K, 40-F, and
20-F of affected issuers for calendar year 2015 for any mention of
China or Qatar. We found that, out of 425 potentially affected issuers,
150 mentioned one of these two countries. However, only 53 of them
described any activity in one of these two countries and 97 mentioned
these countries for other, unrelated reasons. An examination of these
53 filings indicates that most filings did not provide detailed
information on the extent of issuers' operations in these
countries.\671\ Thus, we are unable to determine the total amount of
capital that could be lost in these countries if the information
required to be disclosed under the final rules is, in fact, prohibited
by laws or regulations and exemptive relief is not provided.
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    \670\ See notes 658, 659, and 660 at the beginning of this
section.
    \671\ We note that some resource extraction issuers do not
operate in these two countries and thus would not have any such
information to disclose. Other issuers may have determined that they
were not required to provide detailed information in their filings
regarding their operations in these countries.
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    We can, however, assess if the costs of withdrawing from these two
countries are in line with some commenters' estimates of tens of
billions of dollars provided on the Proposing Release.\672\ To do this,
we first estimate the market value of assets that an issuer currently
owns in a

country with such laws. We then discuss how the presence of various
opportunities for the use of those assets by the issuer or another
entity would affect the size of the issuer's potential losses. We also
discuss how these losses would be affected if an issuer cannot redeploy
the assets in question easily, or if it has to sell them at a steep
discount (a fire sale). In order to estimate the market value of assets
located in one of these countries, we use Compustat geographic segments
data extracted from Exchange Act annual reports to find the fraction of
book value of such assets in the issuer's total assets and assume that
the market value of such assets is the same fraction of the issuer's
total market value.\673\
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    \672\ See letters from ExxonMobil 1, ExxonMobil 2, and RDS 4
(pre-proposal). We note, however, that the Royal Dutch Shell
estimate was submitted in response to the 2010 Proposing Release. In
addition, Royal Dutch Shell is incorporated in the United Kingdom
and listed on the London Stock Exchange and Euronext Amsterdam and
thus is subject to substantially similar disclosure requirements
under existing international transparency regimes.
    \673\ This approach assumes that valuation of assets of a firm
is the same regardless of where these assets are geographically
located. Not all of the assets located in these host countries might
be related to resource extraction payments, which disclosure can
trigger their sale or loss; however, we choose the conservative
approach and err on the side of overestimating the losses.
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    One commenter suggested that our valuation analysis is flawed
because it is based on a book value metric instead of a market value
metric.\674\ The commenter, however, erroneously states that we use
book values to measure the value of an issuer's assets in these two
countries. As stated above, we use book values only to determine what
fraction an issuer's assets in China or Qatar are of that issuer's
total assets. We then apply this fraction to an issuer's market value
to determine the market value of such assets.
---------------------------------------------------------------------------

    \674\ See letter from API 1 (Attachment B).
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    As we discuss above, we were able to identify a total of 53 issuers
that indicated they are active in these countries (some operate in more
than one country). The table below provides information from the 16
issuers, out of the 53 described above, that provide geographic segment
data at the country level and that specifically identify the value of
assets in one of these two countries.\675\ We expect that the actions
taken in response to any foreign law prohibition and the nature of
costs that issuers might face would be different for issuers domiciled
in the United States and in foreign jurisdictions; therefore, we
consider these two types of filers separately.
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    \675\ As noted above, we identified 53 issuers that discussed
their activities in at least one of the two countries, but only 16
of the issuers provided country-level geographic segment information
for those countries that was specific enough to use in our analysis
(some issuers may have determined that they were not required to
provide detailed information in their filings and others might not
have any assets in these countries). In the table, Country Assets
are defined as either Long-lived Assets, Identifiable Total Assets,
or Property, Plant & Equipment, whichever was disclosed; Country
Assets Fraction in Total Assets is Country Assets/Total Assets; and
Market Value Estimate of Country Assets is Country Assets Fraction
in Total Assets * Company Market Value, where Company Market Value
is calculated as Consolidated Company-Level Market Value of Common
Equity + Total Debt + Preferred Stock Liquidating Value--Deferred
Taxes and Investment Tax Credits if all these values were available.
We were not able to identify the company-level market values for
some issuers, and, thus, we were not able to determine their Market
Value Estimate of Country Assets. All Compustat data is the latest
annual data disclosed on or before the date of the issuer's 2015
Form 10-K or 20-F filing.

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                                                                                Market value
                                                          Domicile                        Country assets   Total assets   Country assets    estimate of
            Issuer                   Form type            (business       Host country        ($ mil)         ($ mil)       fraction in   country assets
                                                          address)                                                         total assets       ($ mil)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1............................  10-K                   Foreign.........  China...........            23.4            23.4          100.0%             2.6