On August 10, 2012, President Obama signed the Iran Threat Reduction and Syria Human Rights Act of 2012 (the “Act”), which includes a wide array of amendments to the Iran Sanctions Act of 1996 (ISA), the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (CISADA) and other measures designed to prohibit transactions with Iran and persons or entities listed on the U.S. Department of the Treasury’s Office of Foreign Assets Control’s Specially Designated Nationals and Blocked Persons List (SDNs). As discussed in the comprehensive advisory that Alston & Bird issued on August 1, 2012,1 the Act contains many problematic provisions.

One of the most troubling new requirements is contained in Section 219 of the Act, which requires all companies whose stock (including American Depository Receipts (ADRs)) is traded on U.S. stock exchanges to disclose whether they or their “affiliates” have “knowingly” engaged in certain activities involving Iran or SDNs identified in connection with terrorism or the proliferation of weapons of mass destruction. Section 219 also mandates the public disclosure of any such information by the U.S. Securities and Exchange Commission (SEC) and requires that the President initiate an investigation into whether any such disclosed activities are sanctionable. This provision is scheduled to take effect on February 6, 2013, meaning that all annual or quarterly reports filed with the SEC on or after that date are subject to Section 219’s reporting requirements. The plain language of the statute indicates that these reports should include information regarding activities that occurred “during the period covered by the report,” which in some cases will include activities that occurred prior to February 6, 2013, and even before enactment of the Act. We believe that Section 219 deserves special scrutiny. Affected companies should conduct a careful review of both their and their affiliates’ business activities to ensure that the reports they file with the SEC comply with these requirements.

SECTION 219 REPORTING REQUIREMENTS ARE EXPANSIVE

While many companies whose stock is traded on U.S. stock exchanges already report Iran-related activities in their periodic filings with the SEC or have provided information about such activities to the SEC’s Office of Global Security Risk (OGSR), Section 219 requires additional information and covers some activities that might not otherwise be reported under current SEC rules and guidance or through inquiries from OGSR. Section 219 amends the Securities Exchange Act of 1934 (“Exchange Act”) to require any public company to disclose whether, during the period covered by a periodic report filed on or after February 6, 2013, it or its affiliates knowingly engaged in:

  • an activity described under the ISA or CISADA, including:
    • the transfer of technology or services to Iran that are likely to be used for human rights abuses against the Iranian people, including technology or services used to restrict the free flow of unbiased information in Iran or to disrupt, monitor or restrict the speech of the people of Iran;
    • transactions relating to Iran’s energy industry;
    • transactions facilitating Iran’s procurement or proliferation of conventional weapons or weapons of mass destruction; or
    • certain financial transactions with Iranian financial institutions and other Iranian entities.
  • transactions with persons whose assets are frozen pursuant to executive orders dealing with terrorism or the proliferation of weapons of mass destruction (Note: this includes persons who are not necessarily affiliated with or located in Iran);2 or
  • transactions with the Government of Iran (as that term is defined in OFAC’s Iranian Transactions and Sanctions Regulations, 31 C.F.R. 560) without the specific authorization of a federal department or agency (Note: the Government of Iran was only broadly blocked by Executive Order 13599 as of February 6, 2012; this provision implies that any transactions that are licensed by the U.S. government do not require disclosure).

While neither Congress nor the SEC has defined what constitutes “affiliate” in the context of Section 219, Exchange Act Rule 12b-2 states that “[a]n ‘affiliate’ of, or a person ‘affiliated’ with, a specified person, is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.” Because Rule 12b-2 governs certain reports filed pursuant to the Exchange Act, it is likely that the term “affiliate” will receive a similarly broad interpretation in the context of Section 219. In the same vein, the term “knowingly” is often construed broadly. A person or entity “knowingly” engages in activities if they have actual knowledge, or should know, that they are engaged in such conduct.

Companies that are engaged in any of the activities described above, or whose affiliates are engaged in any of these activities, must report a “detailed description” of each such activity, including:

  • the nature and extent of the activity;
  • the gross revenue and net profits, if any, attributable to the activity; and
  • whether the company or any affiliate of the company intends to continue the activity.

Because the filing company may exercise little to no control over an “affiliate” as this term is broadly construed, it may be difficult to identify and report a “detailed description” of each covered activity, as required by Section 219.

ALL INFORMATION REPORTED UNDER SECTION 219 IS DISCLOSED TO THE PUBLIC AND, IN MANY CASES, REQUIRES FURTHER INVESTIGATION BY THE GOVERNMENT

If a company reports that it or any of its affiliates has knowingly engaged in any activity described above, the company must also file with the SEC, concurrent with its periodic report, a separate notice alerting the SEC that the disclosure has been included in the periodic report and detailing the information listed above. Upon receiving this notice, the SEC is required to “promptly” take the following actions:

  • Transmit the report to:
    • the President of the United States;
    • the Committee on Foreign Affairs and the Committee on Financial Services of the House of Representatives; and
    • the Committee on Foreign Relations and the Committee on Banking, Housing, and Urban Affairs of the Senate.
  • Make the information provided in the disclosure and the notice available to the public by posting the information on the SEC website.

Upon receiving a report that includes a disclosure of any activity described above (with the exception of any licensed transactions involving the Government of Iran), the President is required to initiate an investigation. Within 180 days of the initiation of such an investigation, the President is required to make a determination with respect to whether sanctions should be imposed against the company or the affiliate of the company.

IMPORTANT CONSIDERATIONS FOR COMPANIES THAT MAY BE REQUIRED TO DISCLOSE ACTIVITIES UNDER SECTION 219

  • Companies may be required to disclose activities that took place prior to the effective date of Section 219. This provision is scheduled to take effect on February 6, 2013, meaning that all annual or quarterly reports filed with the SEC on or after that date are subject to Section 219’s reporting requirements. The plain language of the statute indicates that these reports should include information regarding activities that occurred “during the period covered by the report,” which in some cases will include activities that occurred prior to February 6, 2013, and indeed prior to passage of the Act.
  • Many transactions involving Iranian banks must be reported. Because Section 219 requires reporting of “any transactions or dealing” with persons whose assets are frozen for terrorism or proliferation of weapons of mass destruction (NPWMD) reasons, this means, among other things, that any transaction with Government of Iran-owned banks designated for these reasons on the SDN List must be reported. The scope of this provision is truly sweeping. For example, any issuer European bank or any of its “affiliates” that knowingly had a “transaction or dealing” with a covered Iranian bank during the reporting period would have to report it. Similarly, any issuer pharmaceutical company that had an OFAC-licensed sale of medicine or medical products under the Trade Sanctions Reform and Export Enforcement Act (TSRA) that involved an Iranian bank so designated during the reporting period would have to report it (this also raises the prospect of reporting of perfectly lawful activities).
  • Activities that are unrelated to Iran may be reportable under Section 219. Companies are required to report (and the President is required to investigate) all transactions with persons whose assets are frozen pursuant to executive orders dealing with terrorism or the proliferation of weapons of mass destruction. This includes persons who are not necessarily affiliated with or located in Iran.
  • Activities of “any affiliate” must be reported. This will likely include any person or entity that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the company that is publicly listed on a U.S. stock exchange. Because the filing company may exercise little to no control over the “affiliate” as this term is broadly construed, it may be difficult to identify and report a “detailed description” of each covered activity, as required by Section 219.
  • Even minor transactions are reportable under Section 219. A plain reading of the statute indicates that there is no materiality threshold for reporting business activities that meet the criteria discussed above. Therefore, even minor or incidental transactions are reportable.
  • The “Government of Iran” is broadly defined in Section 219. Section 219 requires disclosure of all transactions with the Government of Iran, as that term is broadly defined in OFAC’s Iranian Transactions and Sanctions Regulations. This includes, among other things, any entity that is owned or controlled, directly or indirectly, by the Government of Iran. Because the Government of Iran is involved in many sectors of the Iranian economy, including in some cases the distribution of medicine and medical devices, companies should carefully review their activities (and the activities of their affiliates) to determine if any transactions are reportable under Section 219. (The same issue of reporting of lawful, licensed activities noted above is potentially implicated by the requirement.) Note that this requirement, and others in Section 219, applies to activities of any affiliate of the issuer, including any affiliate outside the United States that may not be a United States person subject to OFAC sanctions on Iran.
  • Not all activities covered by Section 219 are currently sanctionable. As explained in the earlier Alston & Bird advisory, the Act significantly expands the extraterritorial reach of U.S. sanctions against Iran. Nonetheless, it is important to note that, in some cases, the activities that require disclosure under Section 219 are not necessarily prohibited by existing U.S. sanctions. For example, some transactions between non-U.S. sister affiliates of reporting companies and the Government of Iran must be reported under Section 219, but may not be sanctionable under U.S. law.