Public companies doing business with "terrorist-sponsoring states" may come under intensified scrutiny by the Securities and Exchange Commission due to a paragraph slipped into a conference committee report on a major appropriations bill recently passed by Congress. The relevant paragraph (in House Report 108-221 accompanying H.R. 2799) was inserted by Representative Frank Wolf (R., Va.), chairman of the House Appropriations subcommittee overseeing the SEC's budget. It directs the SEC to establish an Office of Global Security Risk within the Division of Corporation Finance. The duties of this new office would include:
The SEC has not yet established the Office of Global Security Risk contemplated by the paragraph. House and Senate Reports do not have binding legal effect on government agencies, but SEC appropriations come up for review every year before Congressman Wolf's subcommittee. Consequently, it seems unlikely that the SEC will completely ignore this directive. To date, the SEC has not taken a clear position on establishing the new office. Laura Cox, SEC managing executive, indicated to THE WALL STREET JOURNAL that up to five Corporation Finance staff members might be assigned. She also noted, however, that industry groups had expressed concerns about the proposal and that those concerns would be treated seriously.
Critics claim that Congressman Wolf's directive would inject a political or foreign policy agenda into the SEC's traditional role as disclosure watchdog. As envisioned by Congressman Wolf, public companies would have to disclose any involvement in the nations identified by the State Department, no matter how insignificant ("no matter how large or small"). Eliminating traditional notions of materiality may indicate that the motivation for creating the new office is more aimed at applying political pressure than on protecting investors. The Securities Industry Association noted this concern in a letter to SEC Chairman William Donaldson, opposing creation of the new office.
This is available at http://www.sia.com/2004_comment_letters/pdf/SEC01-20-04_Intl.pdf.
This is not the first time Congressman Wolf has sought to use the SEC to exert pressure on companies trading with nations under U.S. sanctions. In 2001, he sent a letter to the SEC urging enhanced disclosure requirements for foreign firms seeking access to U.S. markets, particularly foreign firms with operations in such nations. Former Commissioner Laura Unger responded that "doing material business with a country, government or entity on [the Office of Foreign Assets Control's] sanctions list is, in the SEC staff's view, substantially likely to be significant to a reasonable investor's decision about whether to invest in that company."
In another action demonstrating Congressional concern about operations in terrorist-sponsoring states, Senators Charles E. Grassley and Max Baucus (Chair and ranking member of the Senate Finance Committee) sent letters to the CEOs of ConocoPhillips, GE and Halliburton, requesting information on their activities in facilitating transfer of U.S. capital to terrorist-sponsoring states through operations of their non-U.S. subsidiaries in Iran and Syria. The Senators also sent a letter to the Department of Treasury inquiring about (1) effectiveness of its current rules on doing business in nations identified as sponsoring terrorism and (2) its diligence in enforcing such rules.
It is currently difficult to gauge the impact of Congressman Wolf's language in the House Report and other Congressional efforts directed at public companies with activities in "terrorist-sponsoring states." While continuing to monitor developments at the SEC and elsewhere, companies doing business in such nations should be sure to examine their disclosure and U.S. sanctions compliance practices to avoid the possibility of adverse U.S. government action.
Disclaimer
©2004 Dorsey & Whitney LLP. This Corporate Update is intended for general information purposes only and should not be construed as legal advice or legal opinions on any specific facts or circumstances. An attorney-client relationship is not created or continued by sending and receiving this Corporate Update. Members of the Dorsey & Whitney LLP Corporate Group will be pleased to provide further information regarding the matters discussed in this Corporate Update.
- establishing a process by which the SEC identifies all companies listed on U.S. stock exchanges or NASDAQ that operate in State Department-designated "terrorist-sponsoring states" (currently, Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria). U.S. companies are severely limited in their ability to do business in these sanctioned countries, but U.S.-listed foreign companies are not subject to the same limitations;
- ensuring that such companies disclose these activities to investors;
- implementing enhanced disclosure requirements based on the "asymmetric nature of the risk to corporate share value and reputation" stemming from business interests in these countries;
- coordinating with other federal government agencies to share relevant information; and
- initiating a global dialogue to ensure U.S.-traded foreign corporations properly disclose their activities in "terrorist-sponsoring states" to U.S. investors.
The SEC has not yet established the Office of Global Security Risk contemplated by the paragraph. House and Senate Reports do not have binding legal effect on government agencies, but SEC appropriations come up for review every year before Congressman Wolf's subcommittee. Consequently, it seems unlikely that the SEC will completely ignore this directive. To date, the SEC has not taken a clear position on establishing the new office. Laura Cox, SEC managing executive, indicated to THE WALL STREET JOURNAL that up to five Corporation Finance staff members might be assigned. She also noted, however, that industry groups had expressed concerns about the proposal and that those concerns would be treated seriously.
Critics claim that Congressman Wolf's directive would inject a political or foreign policy agenda into the SEC's traditional role as disclosure watchdog. As envisioned by Congressman Wolf, public companies would have to disclose any involvement in the nations identified by the State Department, no matter how insignificant ("no matter how large or small"). Eliminating traditional notions of materiality may indicate that the motivation for creating the new office is more aimed at applying political pressure than on protecting investors. The Securities Industry Association noted this concern in a letter to SEC Chairman William Donaldson, opposing creation of the new office.
This is available at http://www.sia.com/2004_comment_letters/pdf/SEC01-20-04_Intl.pdf.
This is not the first time Congressman Wolf has sought to use the SEC to exert pressure on companies trading with nations under U.S. sanctions. In 2001, he sent a letter to the SEC urging enhanced disclosure requirements for foreign firms seeking access to U.S. markets, particularly foreign firms with operations in such nations. Former Commissioner Laura Unger responded that "doing material business with a country, government or entity on [the Office of Foreign Assets Control's] sanctions list is, in the SEC staff's view, substantially likely to be significant to a reasonable investor's decision about whether to invest in that company."
In another action demonstrating Congressional concern about operations in terrorist-sponsoring states, Senators Charles E. Grassley and Max Baucus (Chair and ranking member of the Senate Finance Committee) sent letters to the CEOs of ConocoPhillips, GE and Halliburton, requesting information on their activities in facilitating transfer of U.S. capital to terrorist-sponsoring states through operations of their non-U.S. subsidiaries in Iran and Syria. The Senators also sent a letter to the Department of Treasury inquiring about (1) effectiveness of its current rules on doing business in nations identified as sponsoring terrorism and (2) its diligence in enforcing such rules.
It is currently difficult to gauge the impact of Congressman Wolf's language in the House Report and other Congressional efforts directed at public companies with activities in "terrorist-sponsoring states." While continuing to monitor developments at the SEC and elsewhere, companies doing business in such nations should be sure to examine their disclosure and U.S. sanctions compliance practices to avoid the possibility of adverse U.S. government action.
Disclaimer
©2004 Dorsey & Whitney LLP. This Corporate Update is intended for general information purposes only and should not be construed as legal advice or legal opinions on any specific facts or circumstances. An attorney-client relationship is not created or continued by sending and receiving this Corporate Update. Members of the Dorsey & Whitney LLP Corporate Group will be pleased to provide further information regarding the matters discussed in this Corporate Update.