On Friday, August 10, President Obama signed into law HR 1905, The Iran Threat Reduction and Syria Human Rights Act of 2012. Among the new law’s provisions is Section 219, which sets forth certain mandatory disclosure requirements regarding specified activities involving Iran and other sanctioned persons for any issuer required to file periodic reports with the U.S. Securities and Exchange Commission.
Commencing with quarterly and annual reports filed after February 6, 2013, issuers must disclose to investors information about dealings by the issuer or its affiliates with respect to certain economic sanctions-related activities. Under Section 219 issuers must disclose in their periodic reports certain information if, during the time period covered by the report, the issuer, or any affiliate of the issuer, knowingly engaged in activities:
- described in Section 5 of the Iran Sanctions Act (which includes activities related to Iran’s petroleum industry and to chemical, biological, or nuclear weapons (collectively, “WMD”) or advanced conventional weapons);
- described in sections 104(c)(2) or (d)(1) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”) (which includes activities by foreign financial institutions that facilitate efforts of the Government of Iran related to WMD or supporting foreign terrorist organizations, or that engage in transactions with or benefiting Iran’s Revolutionary Guard Corps (or any of its agents or affiliates));
- described in section 105A(b)(2) of CISADA (which includes activities related to the transfer of weapons and other technologies to Iran likely to be used for human rights abuses);
- involving persons whose property is blocked pursuant to Executive Orders 13224 and 13382 for WMD and terrorism reasons, respectively; and
- involving persons or entities within the Government of Iran, owned or controlled by the Government of Iran, or acting on behalf of the Government of Iran.
If an issuer or an affiliate of an issuer has engaged in any of the above activities, Section 219 requires the issuer to disclose a detailed description of each activity in its quarterly or annual report and file a separate notice of such disclosure with the SEC. Section 219 requires the SEC post the issuer’s disclosure and its notice on the SEC’s website. The SEC also must transmit the quarterly or annual report to the President and to specified members of Congress. The President is required to initiate an investigation into the possible imposition of sanctions. These reporting requirements will take effect 180 days after the date of enactment of the Act (i.e., on February 6, 2013).
Under current law, if an issuer determines that dealings by it or its affiliates with sanctioned countries or persons would be quantitatively or qualitatively material, the issuer must disclose to investors information about such dealings. Current disclosure requirements emanate from the implementation by many states, public institutions, universities and municipalities of divestment provisions requiring divestment from and/or prohibiting investment in entities where the company or its subsidiaries have dealings with U.S. sanctioned countries such as Iran, Sudan, or Syria. Presently, the Office of Global Security Risk within the SEC monitors whether the documents public companies file with the SEC include disclosure of material information regarding global security risk-related issues, such as dealings with sanctioned countries. From time to time, the Office of Global Security Risk sends inquiries to issuers about activities involving sanctioned countries.
Section 219 of HR 1905 effectively eliminates the materiality standard for disclosing certain dealings with Iran, requiring an issuer to disclose detailed information about itself and any of its affiliates related to certain transactions involving the Government of Iran and other persons sanctioned by the U.S. as outlined above. Under the new reporting requirements, issuers will be required to report any activities outlined in Section 219 of the Act that involve themselves or their affiliates (both domestic and foreign). In addition, with the exception of licensed transactions involving the Government of Iran, all activities must be disclosed. For example, a transaction with the Government of Iran by an affiliate that is not owned or controlled by the issuer (which dealings therefore may not be required to be licensed by the Department of the Treasury’s Office of Foreign Assets Control pursuant to other provisions in HR 1905 and implementing executive orders or regulations) would need to be reported. In addition, disclosure would be required under Section 219 for a licensed transaction involving an individual whose property is blocked pursuant to Executive Orders 13224 or 13382 for WMD or terrorism reasons.
A practical impact of Section 219 may be to cause issuers (and their affiliates worldwide) to shore up existing compliance procedures to screen against the List of Specially Designated Nationals and Blocked Persons, which includes persons whose property is blocked pursuant to Executive Orders 13224 and 13382. Screening should occur before the issuer certifies its quarterly or annual reports to the SEC to take into account changes to business activities as well as any additions or other changes to lists of persons blocked under Executive Orders 13224 and 13382. Issuers that are screening on an annual or semi-annual basis should consider increasing the frequency of screening to quarterly. In addition, because the new law requires reporting for any “dealings,” issuers may want to consider whether screening should include employees, customers, suppliers/vendors, partners/agents, and any other entities (including financial institutions) involved in transactions with the issuer and all its affiliates.
To the extent that an issuer or any one of its affiliates does not already have a screening program in place, the issuer will also want to consider implementing a screening program addressing the information necessary to make the certification. Because implementation of thorough screening measures often is time consuming, issuers should begin examining their compliance processes long before February 2013 to ensure that the measures are adequate to address the mandatory reporting requirements.