In recent years, the U.S. Securities and Exchange Commission appears to be taking a more active role in a regulatory area for which it is not traditionally associated: economic sanctions. So far this year, the SEC has sent comment letters to several major public companies, including PayPal and The Bank of New York Mellon, inquiring about business activities related to U.S. Department of the Treasury’s Office of Foreign Asset Control (“OFAC”) economic sanctions.
The SEC is not acting as a sanctions enforcement body, but rather is focusing its efforts on requesting disclosures from companies that could potentially indicate compliance with or violations of economic sanctions. The SEC puts its sanctions-related disclosure efforts into action by sending comment letters to companies asking for certain company information. Nearly five percent of the comment letters sent out by the SEC last year were sanctions related.
This is significant because companies are likely not as familiar with the SEC’s role in this capacity and may be caught off guard by such an inquiry from the agency. Nevertheless, the increase in SEC letters related to economic sanctions indicates the growing significance of the SEC’s interest in this area, and the need for companies to be prepared to respond.
Notably, a company need not self-report information to attract the attention of the SEC. Instead, the SEC can simply utilize public information as a basis for deciding to send a comment letter inquiring about potential sanctions compliance. Some of our clients, for example, have been contacted after the SEC reviews publicly available information on their website leading the agency to issue inquiries about the companies’ economic sanctions compliance programs.
In addition to public information, comment letters can be initiated based on third-party accounts, and we have seen this type of comment-letter process play out with some of our clients. In one case, the SEC claimed our client’s customer was selling parts to a sanctioned country and asked our client to provide information regarding any potential activities in that country.
Why is the SEC getting more involved in economic sanctions? One possible reason is the global growth of companies and trade generally. Regulation of public companies now involves an understanding of international business issues and concerns, including sanctions. As the government must now monitor entities involved in business all over the world, inter-agency cooperation is one way to make the significant increase in regulated companies more manageable.
Regardless of the justification or motive for the involvement of the SEC, this growing trend is likely to cause confusion for compliance departments and officers around the country. Questions about which agency has jurisdiction over a given matter and which disclosures are required are likely to arise. But what is clear is that public companies must be prepared to diligently respond to the SEC’s letters – which may elicit a review of past transactions which could in turn lead to the discovery of unanticipated issues – and rapidly assess potential legal risks when preparing a response to an information request by the agency. Companies must be ready to act quickly.