83. Given the development of resource extraction payment disclosure
rules in various jurisdictions, is there any reason why, when a final
rule is adopted, we should not make a determination regarding whether
certain foreign reporting regimes satisfy Section 13(q)'s transparency
objectives? If we should decide to make such a determination, which
jurisdictions should we consider? Would the proposed, broader
definition of ``project'' allow for jurisdictions other than the
European Union and Canada to be deemed alternative reporting regimes
that satisfy the transparency objectives of Section 13(q)?

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

    The proposed rules would consider the disclosure provided pursuant
to Section 13q-1 on Form SD as furnished to, but not filed with, with
the Commission.\298\ The Commission originally proposed a similar
approach in the 2012 Rules Proposing Release, but chose to require the
disclosure to be filed in both of the subsequent adopting
releases.\299\ In previously determining that the information should be
``filed,'' the Commission noted that the statute defines ``resource
extraction issuer'' in part to mean an issuer that is required to file
an annual report with the Commission.\300\ This could suggest that the
annual report that includes the required payment information should be
filed.\301\ On the other hand, and as the Commission noted in the 2012
Rules Proposing Release, Section 13(q) does not specifically state how
the information should be submitted, nor does it state that the
disclosure be included in the annual reports that are customarily filed
with the Commission, such as Form 10-K, Form 20-F, or Form 40-F.\302\
---------------------------------------------------------------------------

    \298\ The proposed rules would use the term ``furnished'' when
referring to the requirement to submit Form SD to provide Section
13(q) payment information to the Commission. See also proposed
General Instruction B.3 to Form SD (stating that, for purposes of
Rule 13q-1, the information and documents furnished on Form SD shall
not be deemed to be incorporated by reference into any filing under
the Securities Act or the Exchange Act, unless a registrant
specifically incorporates it by reference into such filing).
    \299\ See 2012 Rules Proposing Release, Section II.F.3; 2012
Rules Adopting Release, Section II.F.3; and 2016 Rules Adopting
Release, Section II.L.3.
    \300\ 15 U.S.C. 78m(q)(1)(D)(i).
    \301\ See Letters from Global Witness (Feb. 25, 2011); Publish
What You Pay U.S. (Feb. 25, 2011); and Senator Benjamin Cardin,
Senator John Kerry, Senator Patrick Leahy, Senator Charles Schumer,
and Representative Barney Frank (Mar. 1, 2011).
    \302\ See 2012 Proposing Release, Section II.F.3.
---------------------------------------------------------------------------

    In previous releases the Commission also looked at the nature of
the disclosure and its likely materiality to investors to determine
whether it should be filed. In the 2012 Rules Proposing Release, the
Commission explained its proposal that the information be deemed
furnished by noting that the nature and purpose of the disclosure
required by Section 13(q) is qualitatively different from the nature
and purpose of existing disclosure that has historically been required
under Section 13 of the Exchange Act. In subsequent releases, however,
the Commission stated that because materiality is a fact specific
inquiry, it

was not persuaded that the nature of this disclosure should be
determinative that the information should not be deemed filed.\303\
---------------------------------------------------------------------------

    \303\ See, e.g., 2016 Rules Adopting Release, Section II.L.
---------------------------------------------------------------------------

    We recognize that compelling arguments can be made on both sides of
this policy choice.\304\ Given the concerns expressed by commenters and
members of Congress regarding the burdens and costs of the required
disclosure, and the CRA's restriction on issuing rules in substantially
the same form as the 2016 Rules, we are proposing to treat the
disclosure provided on Form SD pursuant to Rule 13q-1 as furnished to,
but not filed with, the Commission. This approach would eliminate the
possibility of Section 18 liability for the disclosure. It would also
eliminate the possibility that the disclosure would be incorporated by
reference into a filing under the Securities Act of 1933 (the
``Securities Act'') and be potentially subject to strict liability
under Section 11 of the Securities Act, unless the issuer expressly
incorporated such information.\305\
---------------------------------------------------------------------------

    \304\ For example, commenters who believed that the Section
13(q) information should be deemed ``filed'' maintained that
investors would benefit from the payment information being subject
to Exchange Act Section 18 liability. Other commenters asserted that
allowing the information to be furnished would diminish the
importance of the information while requiring it to be filed would
enhance the quality of the disclosure and ensure that it could be
used reliably for investment analysis and other purposes. Commenters
who favored treating the Section 13(q) disclosure as ``furnished''
emphasized that, in contrast to disclosure that is typically
required to be filed under Section 13, the nature and purpose of the
Section 13(q) disclosure requirements are not primarily for the
protection of investors but, rather, to increase the accountability
of governments for the proceeds they receive from their natural
resources and to support international transparency promotion
efforts relating to the commercial development of oil, natural gas,
or minerals, and that users of the payment information did not need
the level of protection associated with Section 18 liability. See
2012 Adopting Release, Section II.F.3.b.; and 2016 Adopting Release,
Section II.L.2.
    \305\ For example, Form S-3 requires reports ``filed'' pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to
the termination of the offering to be incorporated by reference into
the prospectus. Although Form SD would be the form used for
disclosures under Section 13(q), Section 15(d) of the Exchange Act
refers generally to periodic information, documents, and reports
required by Section 13 reports with respect to securities registered
under Section 12, not simply Section 13(a) reports. Thus, if Form SD
were deemed ``filed,'' it could raise concerns that the payment
disclosure would be incorporated by reference into a Securities Act
filing.
---------------------------------------------------------------------------

    Accordingly, we believe that deeming payment information provided
on Form SD as not ``filed,'' along with the other proposed changes to
the 2016 Rules, would serve to address the concerns expressed by
commenters and members of Congress about the costs and burdens of
disclosure under the disapproved rules. At the same time, we believe
that this change would not significantly undermine the transparency
objectives of Section 13(q), as it would limit the liability associated
with the required disclosures but not the content of those disclosures.
Moreover, we note that, under the proposed rules, Section 13(q)
disclosures would continue to be subject to the Exchange Act's general
antifraud provisions.\306\
---------------------------------------------------------------------------

    \306\ See, e.g., Section 10(b) of the Exchange Act and Rule 10b-
5 thereunder.
---------------------------------------------------------------------------

Request for Comment
    84. Should we deem the resource extraction payment disclosure as
furnished to, but not filed with, the Commission, as proposed?

N. Compliance Date

    Section 13(q) provides that, with respect to each resource
extraction issuer, the final rules issued under that section shall take
effect on the date on which the resource extraction issuer is required
to submit an annual report relating to the issuer's fiscal year that
ends not earlier than one year after the date on which the Commission
issues the final rules under Section 13(q).\307\ The proposed rules
would require a resource extraction issuer to comply with Rule 13q-1
and Form SD for fiscal years ending no earlier than two years after the
effective date of the final rules.
---------------------------------------------------------------------------

    \307\ 15 U.S.C. 78m(q)(2)(F).
---------------------------------------------------------------------------

    The proposed two-year transition period is the same as the
transition period in the 2016 Rules. While we believe that the proposed
rules would meaningfully reduce the compliance costs and burdens for
issuers compared to the 2016 Rules, issuers that have not previously
been subject to an alternative reporting regime would likely have to
modify their internal systems to track, record and report the required
payment information. The proposed two-year transition period should
provide all issuers with sufficient time to establish the necessary
systems and procedures to capture and track all the required payment
information before the fiscal year covered by their first Form SD. It
also should afford issuers an opportunity to make any other necessary
arrangements to comply with Section 13(q) and the proposed rules, such
as consulting with counsel on conflicts with foreign law or contractual
terms, or seeking exemptive relief in other situations.
    We are also proposing to select a specific compliance date that
corresponds to the end of the nearest calendar quarter following the
effective date. For example, if the rules were adopted on December 18,
2019, the compliance date for an issuer with a December 31, 2019,
fiscal year end would be Tuesday, May 31, 2022 (i.e., 150 days after
its fiscal year end of December 31, 2021, which falls on Monday, May
30, 2022, and taking account of the Memorial Day holiday).
Request for Comment
    85. Is the proposed transition period and compliance date
appropriate? Should we instead adopt a shorter or longer transition
period? If so, what should that transition period be and why?
    86. Should the rules provide for a longer transition period for
certain categories of resource extraction issuers, such as foreign
private issuers, so as to provide them additional time to prepare for
the disclosure requirements and the benefit of observing how other
companies comply?

O. General Request for Comment

    We request and encourage any interested person to submit comments
regarding:
     The proposed rules and amendments that are the subject of
this release;
     Potential additions or changes to these proposals; or
     Other matters that may have an effect on the proposals,
particularly any developments since Congress disapproved the 2016 Rules
pursuant to the CRA.
    We request comment from the points of view of all interested
parties. With regard to any comments, we note that such comments are of
great assistance to our rulemaking initiative if accompanied by
supporting data and analysis of the issues addressed in those comments.

III. Economic Analysis

A. Introduction and Baseline

    As discussed above, Section 13(q) mandates a new disclosure
provision under the Exchange Act that requires resource extraction
issuers to identify and report payments they make to foreign
governments or the U.S. Federal Government relating to the commercial
development of oil, natural gas, or minerals. It does so to help
promote accountability and combat corruption within resource-rich
countries.
    We are sensitive to the costs and benefits of the rules we are
proposing, and Exchange Act Section 23(a)(2) requires us to consider
the impact that any new rule would have on

competition. In addition, Section 3(f) of the Exchange Act directs us,
when engaging in rulemaking that requires us to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital formation.
    We have considered the costs and benefits that would result from
the proposed rules, as well as the potential effects on efficiency,
competition, and capital formation. Many of the potential economic
effects of the proposed rules would stem from the statutory mandate,
while others would stem from the discretion we are exercising in
implementing the statutory mandate. As noted above, our discretionary
choices have been informed, in part, by the disapproval of the 2016
Rules under the CRA, and in particular, the concerns expressed by
members of Congress about the compliance costs and burdens of the 2016
Rules and the CRA's restriction on promulgating a substantially similar
rule.\308\ The discussion below addresses the costs and benefits that
might result from both the statute and our discretionary choices, as
well as the comments the Commission received about these matters in the
2016 rulemaking.\309\
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    \308\ Members of Congress who supported the resolution of
disapproval expressed the view that the 2016 Rules would impose
undue compliance costs on companies, undermine job growth and burden
the economy, and impose competitive harm to U.S. companies relative
to foreign competition. See supra Section I.C.
    \309\ Because our discretionary choices are informed by the
statutory mandate, our discussion of the benefits and costs of those
choices necessarily involves the benefits and costs of the
underlying statute.
---------------------------------------------------------------------------

    The baseline the Commission uses to analyze the potential effects
of the proposed rules is the current set of legal requirements and
market practices.\310\ To the extent not already encompassed by
existing regulations and current market practices, the proposed rules
likely would have a significant impact on the disclosure practices of,
and compliance costs faced by, resource extraction issuers. The overall
magnitude of the potential costs of the proposed disclosure
requirements will depend on the number of affected issuers and
individual issuers' costs of compliance. In addition, the proposed
rules could impose burdens on competition, although as discussed
elsewhere in this release, the changes we are making from the 2016
Rules are intended to mitigate those burdens. We expect that the
proposed rules would affect both U.S. issuers and foreign issuers that
meet the definition of ``resource extraction issuer'' in much the same
way, except for those issuers already subject to requirements adopted
in the EEA member countries or Canada, as discussed above in Section
I.B. The discussion below describes the Commission's understanding of
the markets and issuers that would be affected by the proposed
rules.\311\
---------------------------------------------------------------------------

    \310\ See supra Sections I.A. through C. for a discussion of the
current legal requirements and significant international
transparency promotion regimes that affect market practices.
    \311\ In addition to our analysis against the baseline, we have
noted where the proposed rules differ in their economic effects from
the 2016 Rules to illustrate why we think those choices address the
concerns expressed by members of Congress about the 2016 Rules'
costs and potential competitive harm. To be clear, however, our
assessment of the proposed rules' economic effects is measured
against the current state of the world in which issuers are not
required by U.S. law to disclose resource extraction payments.
---------------------------------------------------------------------------

    To estimate the number of potentially affected issuers, we use data
from Exchange Act annual reports for the period January 1, 2018,
through September 30, 2019. We consider all Forms 10-K, 20-F, and 40-F
filed during this period by issuers with oil, natural gas, and mining
Standard Industrial Classification (``SIC'') codes \312\ and thus are
most likely to be resource extraction issuers. We also consider filings
by issuers that do not have the above-mentioned oil, natural gas, and
mining SIC codes and add them to the list of potentially affected
issuers if we determine that they might be affected by the proposed
rules.\313\ In addition, we attempt to remove issuers that use oil,
natural gas, and mining SIC codes but appear to be more accurately
classified under other SIC codes based on the disclosed nature of their
business. Finally, we exclude royalty trusts from our analysis because
we believe it is uncommon for such companies to make the types of
payments that would be covered by the proposed rules.
---------------------------------------------------------------------------

    \312\ Specifically, the oil, natural gas, and mining SIC codes
considered are 1000, 1011, 1021, 1031, 1040, 1041, 1044, 1061, 1081,
1090, 1094, 1099, 1220, 1221, 1222, 1231, 1311, 1321, 1381, 1382,
1389, 1400, 2911, 3330, 3331, 3334, and 3339.
    \313\ These are issuers whose primary business is not
necessarily resource extraction but which have some resource
extraction operations, such as ownership of mines.
---------------------------------------------------------------------------

    From these filings, we estimate that the number of potentially
affected issuers is 677. We note that this number does not reflect the
number of issuers that actually made resource extraction payments to
governments in the period under consideration but rather represents the
estimated number of issuers that might make such payments. It is
possible that some potentially affected issuers, as a response to the
Section 13(q) rules, may decide it is necessary to delist from an
exchange in the United States, deregister, and cease reporting with the
Commission to avoid the potential compliance costs. We believe,
however, that such a scenario is unlikely given the higher cost of
capital and potentially limited access to capital in the future that
issuers who deregister would incur.
    In determining which issuers are likely to bear the full costs of
compliance with the proposed rules, we make three adjustments to the
list of affected issuers. First, we exclude issuers that are smaller
reporting companies and emerging growth companies since the proposed
rules provide an exemption for those issuers. Second, we exclude
issuers that are subject to disclosure requirements in foreign
jurisdictions that generally require more granular disclosure than the
proposed rules and therefore likely already are bearing compliance
costs for such disclosure. Third, we exclude small issuers that likely
could not have made any payment above the de minimis amount of $750,000
to any government entity in the period January 1, 2018 through
September 30, 2019.
    First, among the 677 issuers that we estimate would be affected by
the proposed rules, 211 reported being smaller reporting companies
(SRCs) and 191 reported being emerging growth companies (EGCs) in the
period January 1, 2018, through September 30, 2019. There are 84
issuers that reported both SRC and EGC status during this period.
Subtracting the SRCs and EGCs (total of 318) from the sample of 677
potentially affected issuers results in 359 issuers that would be
subject to the requirements of the proposed rules.
    To address the second consideration, we searched the filed annual
forms for issuers that have a business address, are incorporated, or
are listed on markets in the EEA or Canada.\314\ For purposes of our
analysis, we assume that issuers in these jurisdictions already are
providing more granular resource extraction payment disclosure than the
disclosure that would be required by the proposed rules and thus that
the additional costs to comply with the proposed rules would be much
lower than costs for

other issuers.\315\ We identified 109 such issuers.
---------------------------------------------------------------------------

    \314\ We assume that an issuer is 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 criterion is a proxy for multipronged eligibility
criteria underlying both EEA and Canadian rules that include issuer
assets, revenues, and the number of employees.
    \315\ We are proposing an alternative reporting option for
resource extraction issuers that are subject to foreign disclosure
requirements that the Commission determines satisfy the transparency
objectives of Section 13(q). See infra Section III.C.4. for a
discussion concerning how this alternative reporting option could
potentially reduce compliance costs to a negligible amount for
eligible issuers.
---------------------------------------------------------------------------

    Third, among the remaining 250 issuers (i.e., 359 minus 109) 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 $750,000.
Under these 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 proposed
reporting requirements. We identified 14 such issuers.
    Taking these estimates of the number of excluded issuers together,
we estimate that approximately 236 issuers (i.e., 677 minus 318 minus
109 minus 14) would bear the full costs of compliance with the proposed
rules.\316\
---------------------------------------------------------------------------

    \316\ 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 proposed 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 proposed rules.
---------------------------------------------------------------------------

    In the following economic analysis, we discuss the potential
benefits and costs and likely effects on efficiency, competition, and
capital formation that might result from both the new reporting
requirement mandated by Congress and from the specific implementation
choices that we have made in formulating the proposed rules.\317\ We
analyze these potential economic effects through a qualitative
discussion of the potential costs and benefits that might result from
the payment reporting requirement (Sections III. B and III.C) and our
specific implementation choices (Section III.D), respectively.
---------------------------------------------------------------------------

    \317\ Our consideration of potential benefits and costs and
likely effects on efficiency, competition, and capital formation
also is reflected throughout the discussion in Section II above.
---------------------------------------------------------------------------

    Although aspects of the proposed rules are similar to the 2016
Rules, we have proposed several changes that we believe would have a
significant effect on the resulting compliance costs and burden. These
proposed changes include: (1) The Modified Project Definition, which
requires disclosure at the national and major subnational political
jurisdiction, as opposed to the contract, level; (2) the addition of
two new conditional exemptions for situations in which a foreign law or
a pre-existing contract prohibits the required disclosure; (3)
revisions to the definition of ``control'' to exclude entities or
operations in which an issuer has a proportionate interest; (4)
limitations on liability for the required disclosure by deeming the
payment information to be furnished to, but not filed with, the
Commission; (5) the addition of an instruction in Form SD that would
permit an issuer to aggregate payments by payment type made at a level
below the major subnational government level; (6) revisions to the
filing deadline; and (7) the addition of transitional relief for
issuers that have recently completed their U.S. initial public
offerings. As explained below, we preliminarily believe that these
proposed changes would meaningfully reduce the compliance costs and
burden for issuers compared to the compliance costs and burden
estimated for the 2016 Rules.\318\
---------------------------------------------------------------------------

    \318\ We also are proposing two additional changes to the 2016
Rules, which should further help to reduce the proposed rules'
compliance costs or their potential for competitive harm. One change
would provide transitional relief for issuers that have recently
completed their U.S. initial public offerings. The other change
would define ``not de minimis'' to mean any payment made to each
foreign government in a host country or the Federal Government that
equals or exceeds $150,000, subject to the condition that payment
disclosure for a project is only required if the total project
payments equal or exceed $750,000.
---------------------------------------------------------------------------

B. Potential Benefits Resulting From the Payment Reporting Requirement

    Section 13(q) seeks to combat global corruption by improving
transparency about the payments that companies in the extractive
industries make to foreign governments and the Federal Government.
While these statutory goals and intended benefits are of potential
global significance, the potential positive economic effects that may
result cannot be readily quantified with any precision. The current
empirical evidence on the direct causal effect of increased
transparency in the resource extraction sector on societal outcomes is
inconclusive,\319\ and several academic papers have noted the inherent
difficulty in empirically validating a causal link between transparency
interventions and governance improvements.\320\ Additionally, some
countries may change their behavior as a result of the adoption of the
proposed rules in a way that diminishes the potential benefits of the
rules. For example, some foreign jurisdictions may prefer to deal with
companies that are not subject to the Section 13(q) disclosure
requirements, or take steps to prohibit such disclosure.
---------------------------------------------------------------------------

    \319\ For positive findings, see Caitlin C. Corrigan, ``Breaking
the resource curse: Transparency in the natural resource sector and
the extractive industries transparency initiative,'' Resources
Policy, 40 (2014), 17-30 (finding that the negative effect of
resource abundance on GDP per capita, the capacity of the government
to formulate and implement sound policies and the level of rule of
law is mitigated in EITI countries but noting that the EITI has
little effect on the level of democracy, political stability and
corruption (the author also submitted a comment letter in the 2016
rulemaking attaching an updated version of the study; see Letter
from Caitlin C. Corrigan (Feb. 16, 2016))); Liz David-Barrett and
Ken Okamura, ``The Transparency Paradox: Why Do Corrupt Countries
Join EITI?'', Working Paper No. 38, European Research Centre for
Anti-Corruption and State-Building (Nov. 2013) (finding that EITI
compliant countries gain access to increased aid the further they
progress through the EITI implementation process and that EITI
achieves results in terms of reducing corruption), available at
https://eiti.org/document/transparency-paradox-why-do-corrupt-countries-join-eiti, Maya Schmaljohann, ``Enhancing Foreign Direct
Investment via Transparency? Evaluating the Effects of the EITI on
FDI,'' University of Heidelberg Discussion Paper Series No. 538
(Jan. 2013) (finding that joining the EITI increases the ratio of
the net foreign direct investment inflow to GDP by two percentage
points); Paul F. Villar and Elissaios Papyrakis, ``Evaluating the
Impact of the Extractive Industries Transparency Initiative (EITI)
on Corruption in Zambia. The Extractive Industries and Society,
(2017), forthcoming (finding that EITI implementation reduced
corruption in Zambia); Elissaios Papyrakis, Matthias Rieger, and
Emma Gilberthorpe, ``Corruption and the Extractive Industries
Transparency Initiative,'' Journal of Development Studies, 53
(2017), 295-309 (finding that EITI reduces corruption). For negative
findings, see [Ouml]lcer, Dilan (2009): Extracting the Maximum from
the EITI (Development Centre Working Papers No. 276): Organisation
for Economic Cooperation and Development (finding that the EITI has
not been able to significantly lower corruption levels); Benjamin J.
Sovacool, Goetz Walter, Thijs Van De Graaf, and Nathan Andrews,
``Energy Governance, Transnational Rules, and the Resource Curse:
Exploring the Effectiveness of the Extractive Industries
Transparency Initiative (EITI),'' World Development, 83 (2017), 179-
192 (finding that the first 16 countries that attained EITI
compliance do not perform better than other countries or their own
past performance in terms of accountability, political stability,
government effectiveness, regulatory quality, rule of law,
corruption, foreign direct investment, and GDP growth); Kerem Oge,
``Which transparency matters? Compliance with anti-corruption
efforts in extractive industries,'' Resources Policy, 49 (2016), 41-
50 (finding that EITI disclosure had no significant effect on
corruption in EITI countries).
    \320\ 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; 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.
---------------------------------------------------------------------------

    In response to the 2016 Rules Proposing Release, we received
several comments on quantifying the potential

economic benefits of the rules that we discuss in detail below.\321\
Although these comments presented studies that attempt to quantify
those benefits, as discussed below, all have certain limitations that
we believe prevent us from relying on them to quantify the proposed
rules' potential to improve accountability and governance in resource-
rich countries. Furthermore, no other commenters included reliable data
that would allow us to quantify the potential economic benefits of the
proposed rules or suggested a source of data or a methodology that we
could readily look to in doing so.
---------------------------------------------------------------------------

    \321\ See Letter from Profs. Anthony Cannizzaro & Robert Weiner
(Feb. 11, 2016) (``Cannizzaro & Weiner''). See also Letter from API
(Feb. 16, 2016) and Letter from Publish What You Pay--US (third of
three letters on Mar. 8, 2016) (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 important to note, however, that Congress has directed us to
promulgate a rule requiring disclosure of resource extraction payments.
Thus, in assessing the potential benefits resulting from the rule, we
believe it reasonable to rely on Congress' determination that such a
rule will produce the foreign policy and other benefits discussed above
that Congress sought in imposing this mandate.\322\ In that regard, we
note that Congress did not repeal the mandate under Section 13(q), and
in fact, some members of Congress who supported the joint resolution to
disapprove the 2016 Rules also expressed their ``strong support'' for
the transparency and anti-corruption objectives of the rules.
---------------------------------------------------------------------------

    \322\ We note that these intended benefits differ from the
investor protection benefits that our disclosure rules typically
strive to achieve.
---------------------------------------------------------------------------

    We further note that none of the industry commenters in the 2016
rulemaking expressed the view that the disclosures required by Section
13(q) would fail to help produce anti-corruption and accountability
benefits. Indeed, several commenters expressly acknowledged that
transparency produces such benefits (notwithstanding the inability to
quantify those benefits reliably). 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.'' \323\ 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.'' \324\ 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.'' \325\
---------------------------------------------------------------------------

    \323\ See Letter from BHP Billiton (Jan. 25, 2016).
    \324\ See Letter from Chevron (Feb. 16, 2016).
    \325\ See Letter from Eni SpA (Jan. 31, 2016).
---------------------------------------------------------------------------

    To the extent that the Section 13(q) disclosures increase
transparency and reduce corruption, they could increase efficiency and
capital formation either directly abroad or indirectly in the United
States. 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
proposed 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 do 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.\326\ 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.\327\
---------------------------------------------------------------------------

    \326\ See, e.g., reviews by P. Bardhan, ``Corruption and
Development: A Review of Issues,'' Journal of Economic Literature,
35, no. 3, 1320-1346 (1997); J. Svensson, ``Eight Questions about
Corruption,'' Journal of Economic Perspectives, 19, no. 3, 19-42
(2005) (``Svensson Study'').
    \327\ 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); 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.\328\ Other
studies find that corruption reduces economic growth both directly and
indirectly, through lower investments.\329\ 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.\330\ A commenter on the 2016 Rules cited
its own study suggesting that high levels of corruption (measured by
bribery) correspond to lower levels of economic development.\331\ 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.\332\
---------------------------------------------------------------------------

    \328\ 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).
    \329\ 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); Pierre-
Guillaume M[eacute]on and Khalid Sekkat, ``Does corruption grease or
sand the wheels of growth?'' Public Choice 122, 69-97 (2005).
    \330\ 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); 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).
    \331\ See Letter from Transparency International-USA (Feb. 16,
2016).
    \332\ See id., referring to 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.
---------------------------------------------------------------------------

    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.\333\
---------------------------------------------------------------------------

    \333\ 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); 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 prior 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 under 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.\334\ 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, however, do
discuss corruption in general and its effect on economic growth. In
fact, some specifically discuss the type of corruption addressed by the
statute and proposed rules.\335\ Furthermore, to the extent that
Section 13(q) disclosures are successful in reducing corruption in the
form of misuse of funds, they could also reduce quid pro quo
corruption. For example, if Section 13(q) and the related rules enable
citizens and society to monitor the government and issuers more
strictly, they may become less likely 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 later, after the payment
is made.
---------------------------------------------------------------------------

    \334\ See Letter from API (Feb. 16, 2016).
    \335\ See, e.g., Svensson Study at n.326 above, which defines
corruption as misuse of public office for private gain. This study
cites examples of corruption that are similar to the types of
corruption the proposed rules seek to address.
---------------------------------------------------------------------------

    We also note that global transparency efforts such as the EITI and
others 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. Many studies suggest a possible link between improvements in
transparency, which they measure as a resource-rich country joining the
EITI, and increases in GDP and net foreign direct investments,
reduction in conflict and unrest, and effects on economic
development.\336\ The causal mechanisms involved, however, are complex
(impacted by myriad factors) and it may take several decades before
those mechanisms yield empirically verifiable social gains. While some
of these studies provide useful insight into the potential benefits to
be derived from resource payment transparency regimes, 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.
Additionally, other factors could affect both corruption and economic
development (e.g., a country's institutions), making it difficult to
detect a causal relationship between the former and the latter.
---------------------------------------------------------------------------

    \336\ See Letter from C. Corrigan (Feb. 16, 2016) (referring to
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); Letter from PWYP-US (Feb. 16, 2016) (referring to
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'')); Letter from ONE Campaign (Mar. 16, 2016).
---------------------------------------------------------------------------

    Notwithstanding the foregoing views, we believe the direct
incremental benefit to investors from the Section 13(q) disclosures may
be limited. Most impacted issuers, other than smaller reporting
companies, are already required to disclose their most significant
operational and financial risks \337\ as well as certain financial
information related to the geographic areas in which they operate, in
their Exchange Act annual reports.\338\
---------------------------------------------------------------------------

    \337\ See Items 305 and 503 of Regulation S-K, (17 CFR 229.305
and 229.503).
    \338\ See Item 101(d) of Regulation S-K (17 CFR 229.101(d)).
---------------------------------------------------------------------------

C. Potential Costs Resulting From the Payment Reporting Requirement

    The disclosures required by Section 13(q) could result in direct
and indirect compliance costs and competitive effects for affected
issuers. The direct compliance costs would stem from the anticipated
need to modify issuers' core enterprise resource planning systems and
financial reporting systems to capture and report payment data at the
project level, for each type of payment, government payee, and currency
of payment, to the extent that such payments are not currently tracked
by the issuers' reporting systems. Examples of modifications that may
be necessary include establishing additional granularity in 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 different types
of payment (e.g., royalties, taxes, or bonuses), and developing a
systematic approach to handle ``in-kind'' payments.
    In addition, we anticipate that the statutory reporting
requirements could result in indirect costs and competitive 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 payment reporting requirements under
the U.S. Federal securities laws or analogous foreign disclosure
regimes. 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. Governments of host countries could try to
avoid Section 13(q) payment disclosure by either prohibiting it
outright, or by changing their preferences in favor of dealing with
private and foreign companies that do not have such reporting
obligations. We are unable to estimate how many governments of

resource-rich host countries would try to avoid Section 13(q) payment
disclosure, and by what means.
    Commenters in the 2016 rulemaking were split in their opinion on
the competitive effect of payment information disclosure. Some
commenters argued that confidential production and reserve data could
be derived by competitors or other interested persons with industry
knowledge by extrapolating from the payment information required to be
disclosed.\339\ 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.\340\
---------------------------------------------------------------------------

    \339\ See Letters from API (Feb. 16, 2016) and ExxonMobil (Feb.
16, 2016).
    \340\ See Letters from PWYP-US (Feb. 16, 2016) and Oxfam America
(Feb. 16, 2016).
---------------------------------------------------------------------------

    Whatever the effect, any competitive impact arising from Section
13(q)'s mandated disclosures should be substantially reduced to the
extent that companies are required to disclose payment information in
other jurisdictions, such as the European Union and Canada, which have
adopted laws that require more granular disclosure than that required
by Section 13(q) and the proposed rules.\341\ In that regard, the
proposed rules may provide competitive advantages to U.S. issuers that
are subject to the proposed rules but not subject to the European Union
and Canadian regimes. This is because companies are required to
disclose more granular payment information under the European Union and
Canadian disclosure regimes and those regimes cover a wider pool of
affected issuers (i.e., both registered issuers and large private
issuers are subject to payment disclosure in these regimes). We note,
however, that if industry commenters are accurate in their assessment
of the competitive effects arising from such disclosure requirements,
U.S. issuers that are subject to the proposed rules but not subject to
the EU Directives or other international disclosure regimes might lose
some of the competitive advantage they might enjoy but for the proposed
rules.
---------------------------------------------------------------------------

    \341\ 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).
---------------------------------------------------------------------------

    Some commenters on the 2016 Rules suggested that we permit issuers
to submit payment data confidentially to the Commission and make public
only an aggregated compilation of the information.\342\ These
commenters stated that such an approach would address many of their
concerns about the disclosure of commercially sensitive information or
information that companies were legally or contractually prohibited
from disclosing and would significantly mitigate the costs of the
mandatory disclosure under Section 13(q). Although we are not proposing
this approach, we consider the costs and benefits of this alternative
means of implementation in Section III.D.4 below.
---------------------------------------------------------------------------

    \342\ See, e.g., Letter from API (Feb. 16, 2016); Chevron
(February 16, 2016); Exxon (February 16, 2018).
---------------------------------------------------------------------------

    The proposed rules differ from the 2016 Rules in that they include
a definition of project that is not contract-based and that would allow
for greater aggregation of payment information than under the 2016
Rules. The proposed rules also include two new exemptions for conflicts
with foreign law and contract prohibitions, in addition to the targeted
exemption for payments made in connection with exploratory activities
that was included in the 2016 Rules.\343\ Furthermore, the proposed
rules would permit an issuer to aggregate payments by payment type made
at a level below the major subnational level (e.g., at the county or
municipality level) and disclose such payments without having to
identify the particular subnational government payee. Together, we
believe that these provisions would significantly alleviate, and in
some cases could eliminate, the potential for competitive harm under
the Section 13(q) rules. We also note that in situations involving more
than one payment, the information would be aggregated by payment type,
government, and/or project, which may further limit the ability of a
company's competitors to use the publicly disclosed information to
their advantage.
---------------------------------------------------------------------------

    \343\ As discussed below, the proposed rules also include
transitional relief for newly acquired companies and newly public
companies that should further limit the compliance burdens
associated with the rules.
---------------------------------------------------------------------------

    We discuss below the significant choices we have made to implement
the statutory requirements that are the main drivers of the direct and
indirect compliance costs and of the proposed rules' competitive
effects. We then discuss the associated benefits and costs of those
choices. In that regard, 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. We are asking commenters to provide us with empirical
evidence that will allow us to evaluate these various choices.

D. Discussion of Discretionary Choices

1. Definition of ``Project''
    Section 13(q) requires a resource extraction issuer to disclose
information about the type and total amount of payments made to a
foreign government or the Federal Government for each project relating
to the commercial development of oil, natural gas, or minerals, but it
does not define the term ``project.'' The proposed rules define
``project'' using a three-pronged definition: (1) The type of resource
being commercially developed; (2) the method of extraction; and (3) the
major subnational political jurisdiction where the commercial
development of the resource is taking place.

    The definition of ``project'' appears to be a major determinant of
issuers' costs resulting from the Section 13(q) rules. First, the
definition can affect the extent of direct compliance costs imposed on
affected issuers. The extent of this effect depends on the degree to
which issuers' financial and reporting systems use a different
definition of project (or no definition at all) compared to the one
included in the proposed rules. A number of commenters pointed out that
the more granular contract-based definition of ``project'' that was
proposed in the 2016 Rules would require modifications to issuers' core
enterprise resource planning systems and financial reporting systems to
capture and report payment data for each type of payment, government
payee, and currency of payment.\344\ We also note that some commenters
on the 2016 rulemaking questioned the assertion that the definition of
``project'' would increase compliance costs. They argued that most
issuers already have internal systems in place for recording payments
that would be required to be disclosed under Section 13(q), or that any
adjustments to issuers existing reporting systems needed because of
Section 13(q) could be done in a timely and cost-effective manner.\345\
---------------------------------------------------------------------------

    \344\ See 2016 Rules Adopting Release, Section III.B.2., citing
Letters from API (Jan. 28, 2011); ExxonMobil (Jan. 31, 2011); and
RDS (Jan. 28, 2011).
    \345\ See id., citing Letters from EarthRights International
(Sept. 20, 2011); Global Witness (Feb. 25, 2011); and Publish What
You Pay U.S. (Feb. 25, 2011).
---------------------------------------------------------------------------

    Second, the definition of ``project'' could potentially create
indirect costs in the form of competitive harm for affected issuers.
Such competitive harm could occur if the definition of ``project''
reveals sensitive and proprietary commercial information to
competitors. For example, several commenters in the 2016 rulemaking
suggested that a contract-based definition of ``project'' would result
in the loss of trade secrets and intellectual property more
generally.\346\ One commenter stated that trade secrets and
intellectual property were especially valuable in the resource
extraction industry because of the large sunk costs investments and
uncertain, long-term payoffs.\347\ According to some industry
commenters, a contract-based definition of ``project'' would allow
competitors to derive important information about the new areas under
exploration for potential resource development, the value the company
places on such resources, and the costs associated with acquiring the
right to develop these new resources. This would in turn enable
competitors to evaluate the new resources more precisely, and as a
result, structure their bids for additional opportunities in the areas
with new resources more effectively. Commenters on the 2016 rulemaking
also stated that a contract-based definition of ``project'' would allow
competitors to reverse-engineer proprietary commercial information: for
example, to determine the commercial and fiscal terms of the
agreements, get a better understanding of an issuer's strategic
approach to bidding and contracting, and identify rate of return
criteria.\348\ In contrast with these views, we note that several
commenters in the 2016 rulemaking disputed the assertion that the
contract-based definition of ``project'' would create any competitive
disadvantages to affected issuers.\349\
---------------------------------------------------------------------------

    \346\ See Letters from API (Feb. 16, 2016) and ExxonMobil (Feb.
16, 2016).
    \347\ See Letter from API (Feb. 16, 2016).
    \348\ See Letters from API (Feb. 16, 2016) and ExxonMobil (Feb.
16, 2016).
    \349\ See, e.g., letters from PWYP-US (Feb. 16, 2016) (stating
that the required payment information would not disclose
competitively sensitive information because such information would
not include contractual relationships with downstream processors,
the contribution of the project to the overall profitability of the
reporting issuer, trade secrets, and techniques related to
intellectual property; and denying both that payment transparency is
a decisive factor in competitive bidding processes with host states
to access resources, and that project payment disclosure can be used
by competitors to reverse-engineer commercial terms and succeed in
future bids); see also Global Witness (Mar. 8, 2016). See also
letter from Global Witness (Mar. 8, 2016) (asserting that ``there is
no merit to the claim that US companies would lose out to unlisted
state companies as a result of this rule. In fact, most of the
largest state-owned companies are listed on US and/or European stock
exchanges and would therefore be subject to the same rules as other
US and European issuers.'')
---------------------------------------------------------------------------

    The Modified Project Definition represents a major change from the
definition adopted by the 2016 Rules. We believe that it should
significantly alleviate direct and indirect compliance costs, including
potential competitive harm, for affected issuers. With respect to
direct compliance costs, the proposed definition of ``project'' would
allow an issuer to make the payment disclosure at a higher level of
aggregation than under the 2016 Rules' contract-based definition.
Instead of tracking, recording, and disclosing payment information at
the single contract, license, or lease level, under the proposed
definition, affected issuers would have to report this information at
the resource type, extraction method, and the major subnational
political jurisdiction level. This higher level of information
aggregation should lower the cost of providing the required payment
disclosure because there would be fewer individual data points to be
electronically tagged and reported.\350\ It should also make it easier
for the issuer to report the payment information.
---------------------------------------------------------------------------

    \350\ See the letter from API (Nov. 7, 2013) (noting that ``an
additional benefit of API's project recommendation is clarity and
ease of use for all stakeholders,'' including ``for reporting
companies in submitting data'').
---------------------------------------------------------------------------

    In addition, because as proposed the required payment information
is at a higher level of aggregation than under the 2016 Rules, it is
likely that an issuer already aggregates some of the required payment
information for its own internal accounting or financial reporting
purposes. In that event, requiring payment information at a higher
level of aggregation may be less costly because the issuer may be able
to modify its existing internal accounting systems to collect the
required payment information rather than having to build a new system
to collect the payment information on a contract-by-contract basis.
    Additionally, the proposed definition of ``project'' lacks the
granularity of a contract-based definition, making it less likely that
competitors would be able to reverse-engineer contract terms or glean
sensitive contract information from the disclosure. In this regard, we
note that many of the concerns expressed in the 2016 rulemaking about
revealing sensitive and proprietary commercial information to
competitors derived from the fact that the required disclosure was at
the contract, license or lease level. Thus, the proposed definition of
``project'' should also alleviate potential competitive harm concerns
that affected issuers might have regarding the latter.
    At the same time, the proposed definition of ``project'' would
continue to provide a level of transparency that people could use to
assess revenue flows from projects in their local communities. As we
discuss above in Section III.B, this should have a number of potential
benefits for information users seeking to prevent corruption and
promote accountability.
    We note that, even with the proposed modifications to the
definition of ``project,'' affected issuers would incur significant
compliance costs. Issuers would still be required to track each payment
that they make to foreign governments and the Federal Government in
furtherance of resource extraction activities and thus would likely
need to modify their systems to some degree to collect data on each
payment. In addition, they would be required to electronically tag a
significant amount of information about each payment. Additional
compliance

costs could result from training local personnel on tracking and
reporting, and developing guidance to ensure consistency across
reporting units.
    Finally, we acknowledge that the proposed definition of ``project''
may narrow the scope of the transparency benefits compared to the
previous definition proposed in 2016. We believe, however, that the
revised definition, because it considers the type of resource, the
method of extraction, and the location, will provide substantial
transparency about the overall revenue flows to national and
subnational governments.
2. Exemptions From Disclosure
    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. Such costs could arise if issuers are forced to cease operations
in certain countries or otherwise violate local law. In addition, the
country's laws could have the effect of preventing them from
participating in future projects. Alternatively, the host country may
prefer to engage in deals with companies that are not required to
provide disclosure required under Section 13(q). If an issuer violates
local law, it could suffer expropriation of its facilities in the host
country, the imposition of fines or the withholding of permits. In
connection with the 2016 Rules, some commenters asserted that at least
two countries--Qatar and China--prohibit the required disclosures.\351\
---------------------------------------------------------------------------

    \351\ See Letters from API (Feb. 16, 2016) and ExxonMobil (Feb.
16, 2016).
---------------------------------------------------------------------------

    To the extent that such prohibitions exist and are enforced without
any type of waiver, affected issuers 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.
Thus, 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 could not easily redeploy the assets in question or if it had
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 were redeployed to projects with inferior rates of return. In the
2016 Rules, we estimated that such losses could amount to billions of
dollars.\352\
---------------------------------------------------------------------------

    \352\ See 2016 Rules Adopting Release, Section III.C.
---------------------------------------------------------------------------

    These potentially large indirect costs should be generally
eliminated under the proposed rules. We are proposing an exemption for
situations in which an issuer is unable to provide the required
disclosure without violating the laws of the jurisdiction where the
project is located. The exemption would apply not only to pre-existing
but also to future prohibitions on disclosure, in recognition of the
fact that issuers do not have control over the laws of the jurisdiction
where they are engaged in the commercial development of natural
resources.
    Some commenters in the 2016 rulemaking also suggested that issuers
with existing contracts that prohibit the disclosure required under
Section 13(q) may find themselves in breach of contract if they make
the required disclosure. This, in turn, could result in termination of
ongoing contracts and inability to participate in future projects.\353\
While we do not have data on how often existing contracts contain such
prohibitions, to address the concerns raised by commenters, we are
proposing an exemption for situations in which a pre-existing contract
prohibits the required disclosure. This exemption would differ from the
conflict of law exemption in that, if adopted as proposed, it would
only apply to written terms of contracts that were entered into prior
to the date the Section 13(q) rules are effective. As explained above,
we believe that this limitation is justified because issuers have
control over the terms of their contracts and would be in a position to
modify future contract terms accordingly.\354\
---------------------------------------------------------------------------

    \353\ See Letters from API (Feb. 16, 2016) and Chevron (Feb. 16,
2016).
    \354\ See supra Section II.J.2.
---------------------------------------------------------------------------

    Neither of these proposed exemptions would require an issuer to
apply to the Commission for exemptive relief. This approach should
significantly decrease compliance and indirect costs for issuers that
qualify for either exemption, potentially saving affected issuers
millions of dollars. Compared to the approach taken in the 2016 Rules,
in which affected issuers were required to seek individual relief on a
case-by-case basis, the proposed exemptions would give such issuers
more certainty about the availability of the exemptions. In addition,
the corresponding relief would be available in a timelier manner.
    We note, however, that in addition to reducing costs, the
exemptions might have the unintended consequence of diminishing some of
the benefits of enhanced transparency. For example, 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 jurisdictions that
have failed to do so voluntarily. As mentioned above, we believe that
the likelihood that jurisdictions will pass such laws is limited by the
absence of a similar exemption under the EU Directives or Canada's
ESTMA, which generally require disclosure at a more granular level, and
by the growing global influence of the EITI.\355\
---------------------------------------------------------------------------

    \355\ See discussion in Section II.J.1.
---------------------------------------------------------------------------

    In addition to the exemptions for conflicts with foreign law and
pre-existing contracts, similar to the 2016 Rules, the proposed rules
would allow for delayed reporting for explorative activities and
transitional relief for recently acquired companies not previously
obliged to disclose resource extraction payment information. In a
change from the 2016 Rules, the proposed rules would also provide
transitional relief for companies that have completed their U.S.
initial public offering in the last full fiscal year. These additional
forms of exemptive relief should alleviate compliance costs for
affected issuers. Finally, as in the 2016 Rules, the proposed rules
would allow issuers to apply for exemptive relief on a case-by-case
basis using the procedures set forth in Rule 0-12 of the Exchange Act
for situations posing a significant threat of commercial harm that fall
outside the scope of the other proposed exemptions. We cannot reliably
estimate how frequently potential issuers would apply for exemptive
relief on a case-by-case basis.
    We believe that the exemptions provided under the proposed rules,
subject to issuers meeting specified conditions, would substantially
decrease any indirect costs and competitive effects that may result
from conflicts with foreign law and pre-existing contracts, or from
other situations where the required payment disclosure would pose a
significant threat of commercial harm. However, we acknowledge that, if
issuers cannot meet the conditions for the proposed exemptions, issuers
could potentially incur costs associated with the conflict between the
proposed requirements and those foreign law or pre-existing contract
prohibitions. Similarly, issuers could potentially incur costs in
situations where the Commission denies an issuer's claim for exemptive
relief on a case-by-case basis. Due to lack of data, we cannot reliably
estimate the number of affected issuers that may be unable to

meet the conditions for the proposed exemptions.
    We are also proposing to provide an exemption from the disclosure
requirements for smaller reporting companies and/or emerging growth
companies, or to provide for different disclosure requirements for
these entities. Because the proposed rules could result in significant
fixed compliance costs for resource extraction issuers, smaller
entities that are required to provide the payment disclosure mandated
by Section 13(q) may face particular difficulties meeting those costs.
As noted above, 211 issuers reported being SRCs, 191 issuers reported
being EGCs and 84 issuers reported being both SRCs and EGCs in the
period January 1, 2018, through September 30, 2019. This results in 318
issuers that would not bear compliance costs under the proposed rules
because they reported being SRCs and/or EGCs. The proposed exemption
for smaller reporting companies and emerging growth companies would
avoid adding to the costs of being a public reporting company for these
companies.
3. Annual Report Requirement
    Section 13(q) provides that the resource extraction payment
disclosure must be ``include[d] in an annual report.'' In a change from
the 2016 Rules, the proposed rules require an issuer to furnish the
payment disclosure in an annual report on Form SD instead of filing it.
Requiring covered issuers to furnish, rather than file, the payment
information in Form SD may limit the incremental risk of liability
under Section 18 of the Exchange Act. This limit to the incremental
risk of liability could decrease the quality of payment information
reported to the extent that issuers are less attentive to collecting
and submitting the information. We note, however, that Section 18 does
not create strict liability for ``filed'' information.\356\ In
addition, issuers would still be subject to antifraud liability under
the U.S. Federal securities laws for material misstatements, which
should mitigate the risk of decreased quality of the reported payment
information.
---------------------------------------------------------------------------

    \356\ See Exchange Act Section 18 (15 U.S.C. 78r). A plaintiff
asserting a claim under Section 18 would need to meet the elements
of the statute to establish a claim, including purchasing or selling
a security in reliance on the misstatement and incurring damages
caused by that reliance.
---------------------------------------------------------------------------

    As under the 2016 Rules, the required payment information would be
reported under the cover of Form SD. The Form SD would be due no later
than March 31 in the calendar year following its most recent fiscal
year for issuers with a fiscal year ending on or before June 30 and no
later than March 31 in the second calendar year following its most
recent fiscal year for issuers with a fiscal year ending after June 30.
This should lessen the burden of compliance with Section 13(q) and the
related rules because issuers generally would not have to incur the
burden and cost of providing the payment disclosure at the same time
that they must fulfill their disclosure obligations with respect to
Exchange Act annual reports.\357\ An additional benefit is that this
requirement would provide payment information to users in a
standardized manner for all issuers rather than in different annual
report forms depending on whether a resource extraction issuer is a
domestic or foreign filer. Moreover, requiring the disclosure in Form
SD, rather than in issuers' Exchange Act annual reports, should
alleviate any concerns and costs associated with the disclosure being
subject to the officer certifications required by Exchange Act Rules
13a-14 and 15d-14. Finally, we also believe that the lengthened
submission deadlines would also address the concerns that the public
disclosure of the payment information could cause competitive harm.
---------------------------------------------------------------------------

    \357\ For example, a resource extraction issuer may potentially
be able to save resources to the extent that the timing of its
obligations with respect to its Exchange Act annual report and its
obligations to provide payment disclosure allow for it to allocate
its resources, in particular personnel, more efficiently.
---------------------------------------------------------------------------

    Resource extraction issuers would incur costs associated with
preparing and furnishing the required information on Form SD. We do not
believe, however, that the costs associated with furnishing the
information on Form SD instead of providing it in an existing Exchange
Act form would be significant given that the existing form would have
to be modified to accommodate the requirements of Section 13(q)
disclosure.
4. Public Availability of Data
    The proposed rules would require a resource extraction issuer to
provide the required payment disclosure publicly, including the name of
the issuer. As an alternative to requiring payment disclosure by
individual issuers, we could have proposed implementing Section 13(q)
by permitting resource extraction issuers to provide the information
non-publicly and having the Commission publish, an aggregated and
anonymized compilation of company-provided resource extraction payment
information. Such an approach would mitigate concerns regarding the
disclosure of potentially sensitive information that could create
competitive harm. Additionally, such an alternative would still result
in the disclosure of the type and amount of payments to governments,
albeit on an aggregated basis. According to a commenter in the 2016
rulemaking, such an approach would yield the benefits intended by
Congress and at the same time reduce potential competitive harm.\358\
---------------------------------------------------------------------------

    \358\ See Letter from API (Feb. 16, 2016).
---------------------------------------------------------------------------

    Such anonymized public compilation, however, may not further
transparency efforts to the same degree as company-specific disclosure.
Public individual issuer information may help people monitor individual
issuer's contributions to the public finances and ensure that firms are
meeting their payment obligations and that governments are properly
collecting and accounting for payments. Additionally, the public
disclosure of company-specific, project-level data may help to reduce
corruption to the extent that resource extraction issuers are unwilling
to participate in deals where they believe the revenues may be
corruptly diverted from the government coffers. Requiring issuers to
disclose their payment information publicly would also provide users
with more current and immediately available information than a separate
compilation produced by the Commission. In contrast, under an approach
that depends upon the Commission publishing a separate public
compilation of previously submitted non-public information, users of
the information would have to wait to access the information in an
issuer's Form SD until the Commission publishes its periodic
compilation. We do not believe that the proposed requirement for
issuers to disclose the payment information publicly would increase an
issuer's compliance burden compared to the alternative of issuers
submitting the payment information non-publicly (and the Commission
using the nonpublic submissions to produce a publicly available
compilation). The compliance costs would be similar under each
alternative because the issuer would have to provide the same payment
information to the Commission. Regarding the potential increase in the
risk of competitive harm that may result from public disclosure, we
believe that such increase would be marginal because of the Modified
Project Definition, which, as mentioned above, should significantly
alleviate the likelihood of competitive harm from the disclosure, and
because of the extended filing deadline.

    We are considering, however, the alternative of publishing only an
aggregated, anonymous compilation based on confidentially furnished
Forms SD. This approach would both ensure the public availability of
information about payments made in particular jurisdictions--which may
be sufficient to meet the statute's objectives--without potentially
subjecting affected issuers to competitive harm.
5. Alternative Reporting
    The proposed rules would allow resource extraction issuers subject
to a foreign jurisdiction's resource extraction payment disclosure
requirements to meet their reporting obligations by submitting the
report required by that foreign jurisdiction with the Commission
subject to the condition that the Commission has determined that the
foreign jurisdiction's reporting obligations satisfy the transparency
objectives of Section 13(q). Concurrently with the 2016 Rules Adopting
Release, the Commission issued an order designating the EU Directives
and ESTMA as eligible substitute reporting regimes for purposes of the
alternative reporting provision in those rules. To the extent that the
Commission makes a similar determination upon or following adoption of
the proposed rules, this approach would significantly decrease
compliance costs for issuers that are cross-listed or incorporated in
these jurisdictions. As noted above, we estimated that approximately
109 issuers are subject to other regulatory regimes that may allow them
to utilize this provision.\359\ For these issuers, the costs associated
with preparing and furnishing a Form SD should be negligible, although
they would be required to format the data in interactive (XBRL) format
and potentially translate it into English before submitting it with the
Commission.
---------------------------------------------------------------------------

    \359\ These are issuers that have a business address, are
incorporated, or are listed on exchanges in the EEA or Canada.
---------------------------------------------------------------------------

    As an alternative, we could have proposed not to include such a
provision. Such an alternative may increase the compliance costs for
issuers that are subject to foreign disclosure requirements that
satisfy the transparency objectives of Section 13(q). These issuers
would have to comply with multiple disclosure regimes and bear
compliance costs for each regime, although it is possible that the
marginal costs for complying with an additional disclosure regime would
not be significant given the potential overlap that may exist between
these reporting regimes and the proposed rules.
6. Definition of ``Control''
    Section 13(q) requires resource extraction issuers to disclose
payments made by a subsidiary or entity under the control of the
issuer. As discussed in Section II.E above, we are proposing rules that
define the term ``control'' based on accounting principles.
Alternatively, we could have proposed a definition based on Exchange
Act Rule 12b-2, as in the 2012 Rules.\360\ We believe that the approach
we are proposing would be less costly for issuers to comply with than
such an alternative because issuers are currently required to apply the
accounting concept of ``control'' on at least an annual basis for
financial reporting purposes.
---------------------------------------------------------------------------

    \360\ See 2012 Rules Proposing Release, Section II.D.4.
---------------------------------------------------------------------------

    Using a definition based on Rule 12b-2 would require issuers to
undertake additional steps beyond those currently required for
financial reporting purposes. Specifically, a resource extraction
issuer would be required to make a factual determination as to whether
it has control of an entity based on a consideration of all relevant
facts and circumstances. Thus, this alternative would require issuers
to engage in a separate analysis of which entities are included within
the scope of the required disclosures (apart from the consolidation
determinations made for financial reporting purposes) and could
increase the compliance costs for issuers compared to the approach we
are proposing.
    In addition, there are several other advantages of using a
definition based on accounting principles. There will be audited
financial statement disclosure of an issuer's significant consolidation
of accounting policies in the footnotes to its audited financial
statements contained in its Exchange Act annual reports. Also, an
issuer's determination of control under the proposed rules would be
subject to the audit process as well as subject to the internal
accounting controls that issuers are required to have in place with
respect to audited financial statements filed with the Commission.\361\
All of these advantages may lead to more accurate, reliable, and
consistent reporting of subsidiary payments, thereby enhancing the
quality of the reported data.
---------------------------------------------------------------------------

    \361\ See supra Section II.E.
---------------------------------------------------------------------------

    In a change from the 2016 Rules, the proposed rules do not require
disclosure of the proportionate amount of the payments made by a
resource extraction issuer's proportionately consolidated entities or
operations. Excluding proportionate interest entities or operations
from the proposed definition of control would ameliorate concerns about
the ability of an issuer to obtain sufficiently detailed payment
information from proportionately consolidated entities or operations
when it is not the operator of that venture, thereby limiting
compliance costs for affected issuers. At the same time, this approach
would exclude some joint ventures from the scope of the proposed rules,
thereby limiting the transparency benefits of the Section 13(q)
disclosures. It also could potentially provide an incentive for
affected parties to structure their resource extraction operations in a
manner to avoid disclosure. We note, however, that many other factors,
other than Section 13(q) disclosure, likely would influence how parties
structure their operations and agreements, and some of these factors
may outweigh the disclosure consideration.
    As an alternative, we could have proposed to require disclosure of
payments made by a resource extraction issuer's proportionately
consolidated entities or operations. This alternative would result in
disclosure of payments made by some joint ventures that would not be
covered by the scope of the proposed rules, which would increase the
transparency benefits of the Section 13(q) disclosures compared to the
proposed approach. However, it also would increase compliance costs for
issuers by potentially compelling them to renegotiate their joint
venture agreements or make other arrangements to obtain sufficiently
detailed payment information to comply with the Section 13(q) rules. In
this regard, we note that several commenters in the 2016 rulemaking
expressed concern about the ability of an issuer to obtain sufficiently
detailed payment information from proportionately consolidated entities
or operations when it is not the operator of that venture.\362\ Similar
considerations would apply with respect to a definition of control that
includes a ``significant influence'' test.
---------------------------------------------------------------------------

    \362\ See Letters from API (Feb. 16, 2016); BP (Feb. 16, 2016);
Chevron (Feb. 16, 2016) ; Encana (Jan. 25, 2016); ExxonMobil (Feb.
16, 2016); Petrobras (Feb. 16, 2016); and Royal Dutch Shell (Feb. 5,
2016).
---------------------------------------------------------------------------

7. Definition of ``Commercial Development of Oil, Natural Gas, or
Minerals''
    The proposed rules define ``commercial development of oil, natural
gas, or minerals'' to include exploration, extraction, processing, and
export, or the acquisition of a license for any such activity. As
described above, the proposed rules generally track the

language in the statute. We are sensitive to the fact that a broader
definition of ``commercial development of oil, natural gas, or
minerals'' could increase issuers' costs. We are also sensitive to the
fact that expanding the definition in a way that is broader than other
reporting regimes could potentially lead to a competitive disadvantage
for those issuers covered only by our rules, provided that issuers
subject to other disclosure regimes are exempt from the proposed rules
under the alternative reporting provision. Further, we recognize that
limiting the definition to these specified activities could adversely
affect those using the payment information if disclosure about payments
made for activities not included in the list of specified activities,
such as refining, smelting, marketing, or stand-alone transportation
services (i.e., transportation that is not otherwise related to
export), would be useful to users of the information.
8. Types of Payments
    As under the 2016 Rules, the proposed rules include the specific
types of payments identified in the statute, as well as CSR payments
that are required by law or contract, payments of certain dividends,
and payments for infrastructure. We propose to include payments of
certain dividends and payments for infrastructure because, based on
comments received in prior rulemakings, we believe they are part of the
commonly recognized revenue stream for the commercial development of
oil, natural gas and minerals. For example, payments for infrastructure
improvements have been required under the EITI since 2011.
Additionally, the EU Directives and ESTMA require these payment types
to be disclosed. Thus, including dividends and payments for
infrastructure improvements (e.g., building a road) in the list of
payment types required to be disclosed under the proposed rules would
further the statutory objective of supporting the commitment of the
Federal Government to international transparency promotion efforts.
    As under the 2016 Rules, the proposed rules would include CSR
payments that are required by law or contract in the list of covered
payment types. Some commenters in the 2016 rulemaking argued that these
payments are of material benefit in resource-dependent countries to
both governments and local communities.\363\ One commenter suggested
that some resource extraction issuers already disclose such payments
voluntarily and presented survey data indicating that such payments
could be quite large.\364\ We also note that the EITI requires the
disclosure of CSR payments if required by law or contract.\365\ Thus,
the addition of CSR payments to the list of types of payments that must
be disclosed should improve the quality of the disclosure required by
the statute and would further the statutory objective of supporting the
commitment of the Federal Government to international transparency
promotion efforts relating to the commercial development of oil,
natural gas or minerals. Additionally, to the extent that it is
difficult for certain resource extraction issuers to distinguish
between CSR payments and infrastructure payments, requiring both types
of payments when required by law or contract may lead to lower
compliance costs for those issuers.\366\
---------------------------------------------------------------------------

    \363\ See Letters from Africa Centre for Energy Policy (Feb. 16,
2016); Prof. Harry G. Broadman and Bruce H. Searby (Jan. 25, 2016);
ExxonMobil (Feb. 16, 2016); Eugen Falik (Mar. 7, 2016); and PWYP-US
(Feb. 16, 2016).
    \364\ See Letter from PWYP-US (Feb. 16, 2016).
    \365\ See supra Section II.C.5.
    \366\ See Letter from ExxonMobil (Feb. 16, 2016).
---------------------------------------------------------------------------

    As discussed earlier, under the proposed rules, resource extraction
issuers would incur costs to provide the payment disclosure for the
required payment types. For example, there would be costs to modify the
issuers' core enterprise resource planning systems and financial
reporting systems so that they can track and report payment data at the
project level, for each type of payment, government payee, and currency
of payment. Since some of the payments would be required to be
disclosed only if they are required by law or contract (e.g., CSR
payments), resource extraction issuers presumably already track such
payments and hence the costs of disclosing these payments may not be
large. Nevertheless, the addition of dividends, payments for
infrastructure improvements, and CSR payments to the list of payment
types for which disclosure is required may marginally increase some
issuers' costs of complying with the proposed rules. For example,
issuers may need to add these types of payments to their tracking and
reporting systems. We understand that these types of payments are more
typical for mineral extraction issuers than for oil issuers,\367\ and
therefore only a subset of the issuers subject to the proposed rules
might be affected.
---------------------------------------------------------------------------

    \367\ See, e.g., Letters from PWYP-US (Feb. 16, 2016) and Global
Witness (Feb. 16, 2016). See also Chapter 19 ``Advancing the EITI in
the Mining Sector: Implementation Issues'' by Sefton Darby and
Kristian Lempa, in Advancing the EITI in the Mining Sector: A
Consultation with Stakeholders (EITI 2009).
---------------------------------------------------------------------------

    To address previously expressed concerns about the difficulty of
allocating payments that are made for obligations levied at the entity
level, such as corporate income taxes, to the project level, the
proposed rules would permit issuers to disclose those payments at the
entity level rather than the project level. This accommodation also
should help limit compliance costs for issuers without significantly
interfering with the goal of achieving increased payment transparency.
    Under the proposed rules, issuers must disclose payments made in-
kind. The EU Directives and ESTMA also require disclosure of in-kind
payments, as does the EITI. Consequently, this requirement should help
further the goal of supporting international transparency promotion
efforts relating to the commercial development of oil, natural gas or
minerals and enhance the effectiveness of the payment disclosure. At
the same time, this requirement could impose costs if issuers have not
previously had to value their in-kind payments. To minimize the
potential additional costs, the proposed rules provide issuers with the
flexibility of reporting in-kind payments at cost, or if cost is not
determinable, at fair market value. We believe this approach should
help limit the overall compliance costs associated with our proposal to
require the disclosure of in-kind payments.
9. Definition of ``Not De Minimis''
    Section 13(q) requires the disclosure of payments that are ``not de
minimis,'' leaving that term undefined. Under the proposed rule's
definition of ``not de minimis,'' resource extraction issuers would be
required to disclose payments made to each foreign government in a host
country or the Federal Government that equal or exceed $150,000, or its
equivalent in the issuer's reporting currency, whether made as a single
payment or series of related payments, when the total of the individual
payments related to that project equal or exceed $750,000. Thus, no
payment disclosure is required for projects where the total of the
individual payments related to that project is less than $750,000.\368\
Even if the aggregate payments for a project are equal to or greater
than $750,000, if no single payment or series of related payments of
the same type exceeds $150,000, no

payments disclosure would be required for that project.
---------------------------------------------------------------------------

    \368\ In crafting this proposal, we also have relied on the
Commission's general definitional and exemptive authority. See
Exchange Act Sections 3(b) and 36.
---------------------------------------------------------------------------

    We considered proposing a definition of ``not de minimis'' based on
a qualitative standard or a relative quantitative standard rather than
an absolute quantitative standard. We are proposing an absolute
quantitative approach because an absolute quantitative approach would
be easier for issuers to apply than a definition based on either a
qualitative standard or relative quantitative standard. Thus, using an
absolute dollar amount threshold for disclosure purposes should help
limit compliance costs by reducing the work necessary to determine what
payments must be disclosed.
    We believe that this higher ``not de minimis'' threshold is
necessary to take into account the proposed definition of project,
which aggregates payments at a higher level, which would likely
increase the value of the individual types of payments. As such, we
believe that using the 2016 threshold of $100,000 would likely require
more payment disclosure, thus increasing rather than decreasing the
cost and disclosure burden on issuers, contrary to the guidance
provided by Congress in its disapproval of the 2016 Rules. We further
believe that, in light of the larger aggregations permitted under the
revised definition of project, a quantitative standard based upon
project level and individual payment information establishes a more
appropriate threshold for determining ``not de minimis.'' In addition,
we believe that $750,000 in total payments is the appropriate project
threshold and $150,000 is the appropriate individual payment threshold
because we are proposing to exempt smaller reporting companies and
emerging growth companies from the Section 13(q) disclosure
requirements,\369\ thereby resulting in larger companies, with larger
projects and larger individual payments, being primarily affected by
the proposed rules.
---------------------------------------------------------------------------

    \369\ See supra Section II.J.3.
---------------------------------------------------------------------------

    We believe that this approach, presents a more accurate definition
of ``not de minimis'' from both an issuer's and the host country's
perspective. Although commenters in the previous rulemakings suggested
various thresholds, no commenter provided data to assist us in
determining an appropriate threshold amount.\370\ One commenter
criticized the proposed $100,000 threshold as too low, although the
commenter did not suggest an alternative amount or provide data to
support why the threshold was too low.\371\ For issuers (or their
subsidiaries) that are already providing payment information under
other resource extraction disclosure regimes, our definition of ``not
de minimis'' would likely help minimize compliance costs associated
with determining which payments should be reported because these
issuers could report under the proposed rule using the payment
thresholds under their respective jurisdiction and be in compliance.
---------------------------------------------------------------------------

    \370\ See, e.g., 2012 Rules Adopting Release, n.235 and n.243
and accompanying text.
    \371\ See Letter from Nouveau (Feb. 16, 2016).
---------------------------------------------------------------------------

    We also considered defining ``not de minimis'' either in terms of a
materiality standard or by using a larger dollar threshold for
individual payment disclosure, such as $1,000,000. Both of these
alternatives might result in lower compliance costs and might lessen
competitive concerns relative to the proposal. They also would result
in less payment transparency, thereby reducing the intended benefits of
the Section 13(q) disclosures.
10. Exhibit and Interactive Data Requirement
    Section 13(q) requires the payment disclosure to be electronically
formatted using an interactive data format. The proposed rules would
require a resource extraction issuer to provide the required payment
disclosure in an XBRL exhibit to Form SD that includes all of the
electronic tags required by Section 13(q) and the proposed rules.\372\
We believe that requiring the specified information to be presented in
XBRL format would offer advantages to issuers and users of the
information by promoting consistency and standardization of the
information and increasing the usability of the payment disclosure.
Providing the required disclosure elements in a machine-readable
(electronically tagged) format would allow users to quickly examine,
extract, aggregate, compare, and analyze the information in a manner
that is most useful to them. This includes searching for specific
information within a particular submission as well as performing large-
scale statistical analysis using the disclosures of multiple issuers
and across date ranges. The proposed rules also require issuers to tag
the subnational geographic location of a project using ISO codes. Using
ISO codes would standardize references to those subnational geographic
locations and would benefit the users of this information by making it
easier for them to sort and compare the data. It also would increase
compliance costs for issuers to the extent that they do not currently
use such codes in their reporting systems.
---------------------------------------------------------------------------

    \372\ Users of this information should be able to render the
information by using software available on the Commission's website
at no cost.
---------------------------------------------------------------------------

    Specifying XBRL as the required interactive data format may
increase compliance costs for some issuers. The electronic formatting
costs would vary depending upon a variety of factors, including the
amount of payment data disclosed and an issuer's prior experience with
XBRL. We expect that most issuers are already familiar with XBRL as
they use it to tag financial information in their annual and quarterly
reports filed with the Commission. Thus, we do not expect most affected
issuers to incur start-up costs associated with the format.
Additionally, we do not believe that the ongoing costs associated with
this formatting requirement would be significantly greater than filing
the data in XML.\373\
---------------------------------------------------------------------------

    \373\ See 2016 Rules Adopting Release, Section II.C.9.
---------------------------------------------------------------------------

    Consistent with the statute, the proposed rules require a resource
extraction issuer to include an electronic tag that identifies the
currency used to make the payments. Under the proposed rules, if
multiple currencies are used to make payments for a specific project or
to a government, a resource extraction issuer may choose to provide the
amount of payments made for each payment type and the total amount per
project or per government in either U.S. dollars or the issuer's
reporting currency.\374\ We recognize that a resource extraction issuer
could incur costs associated with converting payments made in multiple
currencies to U.S. dollars or its reporting currency. Nevertheless,
given the statute's tagging requirements and the requirement to
disclose total amounts, we believe reporting in one currency is
necessary.\375\ The proposed rules provide flexibility to issuers in
how to perform the currency conversion, which may help to limit
compliance costs by allowing issuers to choose the option that works
best for them.
---------------------------------------------------------------------------

    \374\ See Instruction 2 to Item 2.01 of Form SD.
    \375\ See supra Section II.K.
---------------------------------------------------------------------------

11. Quantitative Estimates of Costs Resulting From the Proposed
Rulemaking
    In the 2016 Rules Adopting Release, the Commission quantified the
direct compliance costs of the 2016 Rules based on information provided
by commenters. The Commission estimated initial compliance costs to be
in the

range of $54.7 to $574.4 million assuming no fixed costs and in the
range of $238.8 to $700.2 million assuming the rule requirements would
generate fixed costs for affected issuers. The Commission estimated the
ongoing compliance costs to be in the range of $21.9 to $547.3 million
assuming no fixed costs and in the range of $95.5 to $590.7 million
assuming fixed costs.
    In the 2016 Rules Adopting Release, the Commission also attempted
to quantify some of the indirect costs resulting from the rule and
specifically quantified the costs arising from a foreign law
prohibition against Section 13(q) disclosure. For eight potentially
affected issuers domiciled in the United States that had assets in
China or Qatar, the estimated total loss range was between $1.7 million
and $3.1 billion, with a median loss of $291.4 million. The aggregate
fraction of total assets that might be affected was 2.7 percent. We
note that these estimates applied only to issuers that had assets in
one of the host countries. The Commission also estimated the fire sale
prices at which affected issuers could dispose of their assets in
countries with laws prohibiting disclosure, should such need arise. The
analysis suggested that a discount of 69 percent was warranted. For
U.S.-based issuers, applying the highest discount of 69 percent to the
market value of the issuers' assets in these host countries suggested a
range of losses between $1.2 million and $2.1 billion, with a median
loss of $201.1 million.
    Given the substantial changes introduced into the proposed rules
compared to the 2016 Rules, we believe that the estimates from the 2016
Rules are no longer accurate. At present, we do not have data that will
allow us to quantify reliably the costs (either direct compliance costs
or indirect competitive harm) resulting from the proposed rules. For
example, we lack data on the main components of initial and ongoing
compliance costs, the fraction of compliance costs that are fixed, and
how the various statutory and similar foreign law requirements affect
compliance costs. Since issuers currently are not required to disclose
such costs in their SEC filings, and since such costs generally are not
otherwise made publicly available, we do not have information about
them.
    A 2018 study by the UK Department for Business, Energy & Industrial
Strategy (the ``UK study'') is another source of potential cost
estimates.\376\ We reviewed that data but found it is of limited use
for the following reasons. First, we are unable to use the data to
determine the cost estimates for the rules we are proposing in this
release because the Modified Project Definition in the proposed rules
is different from the definition in the UK rules. Specifically, the
payment disclosure would be provided at a greater level of aggregation
under the proposed rules than under the UK contract-level definition.
---------------------------------------------------------------------------

    \376\ See supra n. 67 and accompanying text.
---------------------------------------------------------------------------

    Second, the small sample size in the UK study makes it difficult
for us to assess with any confidence the actual costs of the UK's
regime (which, broadly speaking, is very similar to the 2016 Rules that
were rejected by Congress under the Congressional Review Act). The
majority of companies (84%) surveyed in the UK study indicated that
they do not track compliance costs. As such, the study relied on actual
or estimated compliance cost data from 15 companies that may or may not
be representative of the broader population. In any event, the
estimates of total compliance costs (initial and ongoing) in the UK
report are broadly consistent with the range we estimated in the 2016
Rules, which like the UK regime had a contract-level definition of
project. Based on the data provided by the 15 companies that responded,
the total compliance costs under the UK rules ranged from approximately
$24,547 per company for small companies to approximately $2,260,263 per
company for large companies. The range that we estimated in connection
with the 2016 rules was $180,302 per company to $2,937,319 per company.
Request for Comments
    We request comment on the potential costs and benefits of the
proposed rules and whether the rules, if adopted, would promote
efficiency, competition, and capital formation or have an impact or
burden on competition. In particular, we request comments on the
potential effect on efficiency, competition, and capital formation
should the Commission not adopt certain exceptions or accommodations.
Commenters are requested to provide empirical data, estimation
methodologies, and other factual support for their views, in
particular, on costs and benefits estimates. Our specific questions
follow.
    87. Are there any additional benefits from the proposed rules than
the ones mentioned discussed above? Is there information that could
help us quantify any benefits of the proposed rules?
    88. What are the lessons about the benefits from the resource
extraction payment disclosure regimes that already exist in other
jurisdictions? Is there empirical evidence on benefits from the
disclosure regimes that are already in place?
    89. We seek information that would help us quantify compliance
costs (both initial and ongoing) more precisely. In particular, we
invite issuers and other commenters that have experience with the costs
associated with reporting under the EU Directives or ESTMA to provide
us with information about those costs. What are the actual compliance
costs for issuers that have started to comply with the disclosure
requirements imposed under the EU Directives or ESTMA?
    90. What is the breakdown of various compliance costs, such as
legal fees, direct administrative costs, information technology/
consulting costs, training costs, and travel costs? What are the main
drivers of compliance costs?
    91. What is the proportion of fixed costs in the direct compliance
costs structure of potentially affected resource extraction issuers?
Would smaller resource extraction issuers incur proportionally lower
compliance costs than larger resource extraction issuers? Would
affiliated issuers be able to save on fixed costs of developing
compliance systems through sharing such costs? If so, what is the
estimate of such savings?
    92. Are there additional costs and benefits from the proposed
definition of ``project''? How do issuers typically define ``project''
in their reporting systems? How costly would it be for issuers to
switch from the definition of ``project'' that they currently use to
the one being proposed in these rules? Would our proposed definition of
project reduce compliance costs for issuers compared to a contract-
based definition of project?
    93. Are there any additional effects on efficiency, competition,
and capital formation that we have not considered? Are there any
additional indirect costs or competitive harm that we have not
considered?
    94. Is our approach to identify small issuers that likely do not
make any payments above the proposed de minimis amount reasonable? Are
annual revenues and net cash flows from investing activities taken
together an appropriate measure for such purpose?
    95. What are the costs of converting a resource extraction payment
report in the format required by the EU Directives or ESTMA (e.g., XLS
or PDF) to the report format required by the proposed rules (i.e.,
XBRL)?
    96. What are the costs and benefits arising from confidential
submission of the payment information? What are the costs and benefits
arising from public disclosure of the payment information? How do the
potential costs of public

disclosure to issuers compare to its potential benefits of the
information?
    97. Are there studies on the potential effects of the proposed
rules, the disclosure rules under the EU Directives or ESTMA, or EITI
compliance on efficiency, competition, and capital formation? What are
the potential competitive effects of the proposed rules and how might
they be impacted by regulations promulgated pursuant to the EU
Directives and ESTMA? What fraction of international extractive
companies would be affected by at least one of the U.S., EU, or
Canadian rules?
    98. What are the benefits and costs of an alternative reporting
option for issuers that are subject to a foreign jurisdiction's
resource extraction payment disclosure requirements that are determined
to satisfy the transparency objectives of Section 13(q)? How much would
such issuers save in compliance costs if they have the option to
satisfy their filing obligations by filing the report required by that
foreign jurisdiction with the Commission?

IV. Paperwork Reduction Act

A. Background

    Certain provisions of the proposed rules contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\377\ The Commission is submitting the
proposal to the Office of Management and Budget (``OMB'') for review in
accordance with the PRA.\378\ An agency may not conduct or sponsor, and
a person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number. The title for
the collection of information is:
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    \377\ 44 U.S.C. 3501 et seq.
    \378\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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     ``Form SD'' (OMB Control No. 3235-0697).\379\
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    \379\ As discussed above, proposed Rule 13q-1 requires a
resource extraction issuer to submit the payment information
specified in Form SD. The collection of information requirements
associated with the proposed rules would be reflected in the burden
hours estimated for Form SD. Therefore, there is no separate burden
estimate for Rule 13q-1.
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    Form SD is currently used to file Conflict Minerals Reports
pursuant to Rule 13p-1 of the Exchange Act. We are proposing amendments
to Form SD to accommodate disclosures required by proposed Rule 13q-1.
It would require resource extraction issuers to disclose information
about payments made by the issuer, a subsidiary of the issuer, or an
entity under the control of the issuer to foreign governments or the
U.S. Federal Government for the purpose of the commercial development
of oil, natural gas, or minerals. Form SD would be submitted to the
Commission on EDGAR.
    The proposed rules and amendment to the form would implement
Section 13(q) of the Exchange Act, which was added to the Exchange Act
by Section 1504 of the Dodd-Frank Act. As described in detail
above,\380\ Section 13(q) directs the Commission to issue rules
requiring resource extraction issuers to include in an annual report
certain specified information relating to payments made to a foreign
government or the Federal Government for the purpose of the commercial
development of oil, natural gas, or minerals. In addition, Section
13(q) requires a resource extraction issuer to provide information
about those payments in an interactive data format. We are proposing to
require that the mandated payment information be provided in an XBRL
exhibit to Form SD. The disclosure requirements would apply equally to
U.S. issuers and foreign issuers meeting the definition of ``resource
extraction issuer.''
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    \380\ See supra Section I.A.
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    Compliance with the rules by affected issuers would be mandatory.
Responses to the information collections would not be kept confidential
and there would be no mandatory retention period for the collection of
information.

B. Estimate of Issuers

    The number, type, and size of the issuers that would be required to
file the payment information required in Form SD, as proposed to be
amended, is uncertain, but, as discussed in the economic analysis
above, we estimate that the number of potentially affected issuers is
677.\381\ Of these issuers, we excluded 318 issuers that reported being
either smaller reporting companies, emerging growth companies, or both,
because the proposed rules would exempt both types of issuers from the
Section 13(q) requirements. In addition, we excluded 109 issuers that
are subject to resource extraction payment disclosure rules in other
jurisdictions that require more granular payment disclosure than would
be required by the proposed rules, and 14 issuers with no or only
nominal operations, or that are unlikely to make any payments that
would be subject to the proposed disclosure requirements.\382\ For the
109 issuers subject to those alternative reporting regimes, the
additional costs to comply with the proposed rules would likely be much
lower than costs for other issuers.\383\ For the 14 issuers that are
unlikely to make payments subject to the proposed rules, we believe
there would be no additional costs associated with the proposed
rules.\384\ Accordingly, we estimate that 236 issuers would bear the
full costs of compliance with the proposed rules \385\ and 109 would
bear significantly lower costs.
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    \381\ See supra Section III.A. (explaining how we use data from
Exchange Act annual reports for the period January 1, 2018 through
September 30, 2019 to estimate the number of issuers that might make
payments covered by the proposed rules). As noted in that section,
this number does not reflect the number of issuers that actually
made resource extraction payments to governments.
    \382\ See id. (describing how we identify issuers that may be
subject to those alternative reporting regimes and how we use shell
company status and revenues and net cash flows from investing
activities to identify issuers that would be unlikely to make
payments exceeding the proposed ``not de minimis'' threshold).
    \383\ Issuers subject to the alternative reporting regimes
described above would already be gathering, or have systems in place
to gather, resource extraction payment data, which should reduce
their compliance burden. In addition, under the proposed rules, a
resource extraction issuer that is subject to the resource
extraction payment disclosure requirements of an alternative
reporting regime, deemed by the Commission to require disclosure
that satisfies Section 13(q)'s transparency objectives, may satisfy
its payment disclosure obligations by including, as an exhibit to
Form SD, a report complying with the reporting requirements of the
alternative jurisdiction. See proposed Item 2.01(c) of Form SD. When
adopting its Section 13(q) rules in 2016, in a concurrent order, the
Commission determined that an issuer could substitute a report
prepared pursuant to the EU Directives or Canada's ESTMA to satisfy
its disclosure obligations under the 2016 Rules. If the Commission
were to make a similar determination in respect of the proposed
rules, the 109 issuers subject to those foreign laws would incur
relatively small compliance burdens and costs associated with the
proposed rules. We have nevertheless included them in our estimate
of affected issuers for PRA purposes because under the proposed
rules they would still have an obligation to furnish a report on
Form SD in XBRL, although with a significantly lower associated
burden.
    \384\ See supra Section III.A.
    \385\ 677 minus 318 minus 109 minus 14 = 236.
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C. Estimate of Issuer Burdens

    We derive our burden estimates by estimating the average number of
hours it would take an issuer to prepare and furnish the required
disclosure. In deriving our estimates, we recognize that the burdens
would likely vary among individual issuers based on a number of
factors, including the size and complexity of their operations and
whether they are subject to similar disclosure requirements in other
jurisdictions.
    When determining the estimates described below, we have assumed
that 75 percent of the burden of preparation is carried by the issuer
internally and 25 percent of the burden of preparation is carried by
outside professionals retained

by the issuer at an average cost of $400 per hour.\386\
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    \386\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis, we estimate that
such costs would be an average of $400 per hour. This is the rate we
typically estimate for outside legal services used in connection
with public company reporting. We note that in the 2016 rulemaking,
one commenter used $150 per hour in its analysis of the costs
associated with the proposed rules. See letter from Claigan
Environmental (Feb. 16, 2016). The Commission disagreed with that
estimate, however, because the rate did not factor in the outside
professional costs associated with preparing a document under
applicable securities laws. We believe a resource extraction issuer
would likely seek the advice of an attorney to help it comply with
the rule and form requirements under U.S. Federal securities laws.
Accordingly, we continue to use the $400 per hour estimate when
considering the applicable costs and burdens of this collection of
information.
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    The portion of the burden carried by outside professionals is
reflected as a cost, while the portion of the burden carried by the
issuer internally is reflected in hours. We expect that the proposed
rules' burden would be greatest during the first year of their
effectiveness and diminish in subsequent years. To account for this
expected diminishing burden, we use a three-year average of the
expected implementation burden during the first year and the expected
ongoing compliance burden during the next two years.
    We believe that the burden associated with this collection of
information would be greatest during the initial compliance period in
order to account for initial set up costs, including initial
adjustments to an issuer's internal books and records, plus costs
associated with the collection, verification and review of the payment
information for the first year. We believe that ongoing compliance
costs would be less because an issuer would have already made any
necessary modifications to its internal systems to capture and report
the information required by the proposed rules.
    When conducting the PRA analysis in connection with the 2016 Rules,
the Commission used an estimate for compliance costs and burden
provided by a commenter on the 2012 Rules Proposing Release.\387\ That
commenter estimated that, for an issuer bearing the full costs and
burden, compliance with those rules would require 500 hours to make
initial changes to the issuer's internal books and records and another
500 hours a year on an ongoing basis to review and verify the payment
information.\388\ Based on the commenter's estimates, the Commission
estimated that the 2016 Rules would result in 217,408.65 total
incremental company burden hours and $71,487,820 total outside
professional costs.\389\
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    \387\ See the 2016 Rules Adopting Release, Section IV.C., citing
the letter from Barrick Gold (Feb. 28, 2011). When presenting its
own cost estimates for the 2016 Rules, one commenter stated that
``the Barrick costing model seems to be the most valid and accurate
costing model submitted to SEC and should be attributed more weight
by the SEC when calculating expected industry costs.'' Letter from
Claigan Environmental (Feb. 16, 2016).
    \388\ Barrick Gold also estimated that its initial compliance
with the rules would require $100,000 for IT consulting, training
and travel costs. See id.
    \389\ These total burden and cost estimates were based on the
Commission's estimates that 425 issuers would bear the full burden
and costs of the 2016 Rules and 192 issuers would bear a
significantly reduced burden and costs because they were already
subject to similar payment disclosure requirements in foreign
jurisdictions. See id.
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    The Commission's PRA burden estimates for the 2016 Rules were based
on a version of Section 13(q) rules that would have been more onerous
than the proposed rules.\390\ As discussed more fully in Section III
above, we believe that the proposed changes to the 2016 Rules, in
particular the proposed definition of project and the proposed
exemptions for conflicts with foreign law and pre-existing contracts,
would meaningfully reduce the compliance burden and costs for issuers
compared to the 2016 Rules. Because of these proposed changes, we
believe that it would be appropriate to adjust the 2016 PRA burden
estimates to account for this reduction in burden and costs.
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    \390\ For example, neither the 2012 Rules nor the 2016 Rules
provided for exemptions for conflicts with foreign law or pre-
existing contracts, which we are proposing in this rulemaking. See