FR 2020-28103

General Summary

The Securities and Exchange Commission (SEC) has implemented a new rule under the Securities Exchange Act of 1934 aimed at increasing transparency in the resource extraction industry. Specifically, this rule requires companies involved in extracting oil, natural gas, or minerals to publish details regarding payments made to foreign governments or the U.S. federal government for commercial development activities. The information must cover the type and total amount of such payments and be made available publicly in an electronic format. The rule aims to deter corruption and hold governments accountable, although there are some provisions for exemptions and delayed reporting to ease compliance for smaller entities.

Significant Issues and Concerns

A notable concern is the document's complexity, which primarily results from technical jargon and numerous legal references that may be inaccessible to the general public. The distinction between 'furnished' and 'filed' data, particularly concerning liability under Section 18 of the Exchange Act, may be obscure to those not versed in legal terminology. Furthermore, there is a risk that exemptions, intended for scenarios like conflicts with foreign law or existing contracts, might encourage inconsistent compliance and potentially offer loopholes that could undermine the rule's intent. Additionally, the change from a contract-level definition of 'project' to a different standard could compromise transparency compared to other regions like the European Union and Canada.

Broad Public Impact

The document's enforcement suggests a significant move towards ensuring that the financial activities surrounding natural resource extraction are transparent. While intended to prevent corruption and hold governments accountable, extended transition periods and options for delayed reporting could hinder immediate transparency. The public, as well as civil society organizations, might find the rule beneficial in fostering accountability and reducing corruption in resource-rich countries.

Impact on Specific Stakeholders

• Positive Impact: Stakeholders advocating for increased transparency and anti-corruption measures are likely to view these rules as a step forward. The rule could empower citizens of resource-rich countries to hold their governments accountable for revenues from resource extraction.

• Negative Impact: For companies involved, particularly smaller entities, the requirement to report in a specific electronic format like XBRL could impose additional administrative and financial burdens if they lack the systems to manage this format. Additionally, the rule's exemptions and reporting delays, although they may relieve some compliance pressures, might also dilute the rule's effectiveness in curbing corrupt practices. Moreover, companies may face difficulties balancing different regulatory environments if operating in multiple jurisdictions with varying requirements.

Overall, the rule carries the potential for both positive changes in governance and challenges related to compliance, particularly for smaller and mid-sized extraction companies.

The Federal Register document focuses on the implementation of rules regarding the disclosure of payments made by companies involved in resource extraction, such as oil, natural gas, and minerals. These payments are made to foreign governments and the Federal Government of the United States for the commercial development of these resources. The document sets out to clarify the rules and definitions around these payments, especially concerning compliance, transparency, and how these affect companies involved.

Summary of Financial References

The document frequently mentions the “not de minimis” payment threshold, defining it as any payment that equals or exceeds $100,000. This figure is a recurring point of financial reference, representing the minimum amount that companies would need to disclose when they make payments to governments. This threshold is significant because it sets the baseline for what counts as a reportable payment, thereby directly influencing what figures will be captured under the rule's transparency efforts.

The previous proposal had suggested a higher threshold of $150,000 for a project, with an additional overall threshold of $750,000 for total project payments. However, the final adopted figure was set at $100,000, aligning better with international standards.

Relation to Identified Issues

One of the identified issues is the potential inconsistency due to exemptions being claimed inappropriately, which could undermine the rule's objectives. The financial threshold is central to determining what payments fall under the disclosure requirements. As such, setting consistent financial levels like the $100,000 threshold aims to prevent misuse and ensure transparency, addressing concerns over potential inconsistencies.

The document discusses the financial burden on companies for preparing disclosures and the potential cost savings which might arise from adopting uniform definitions and thresholds. It was estimated that the average cost for companies to comply per issuer was about $300,000, with some companies quoting specific compliance brackets: Total S.A. provided a cost estimate of $200,000 per year for compliance with similar requirements under the EU Directives. Other costs, including initial setup, could reach $420,000.

By comparison, these financial requirements are intended to prevent unnecessary expenditures by adhering to standards consistent across international and U.S. federal regulations (such as those seen in Europe and Canada), and thus provide a benefit in leveling the playing field globally.

Compliance and Cost Burden

Another major financial reference in the document includes the estimated compliance costs detailed for various companies. Total compliance costs under a similar UK rule ranged from about $24,547 for small companies to approximately $2,260,263 for larger entities. These figures highlight the variable financial impact that compliance could have on different sized companies, an essential consideration for regulatory bodies in enforcing these rules.

Finally, the document employs qualitative measures to express the cost and burden concerns, noting that precise figures were scarce, and subjective evaluations were used instead. Though qualitative assessments might not capture the entire range of financial impacts, they attempt to estimate the financial burdens or cost savings for issuers.

The document underscores the importance of ensuring that financial transparency is balanced with the compliance costs that a company must bear, using the payment threshold and reporting costs to align the rule’s financial incentives with transparency objectives.