The Iran Threat Reduction and Syria Human Rights Act of 2012 (the “Act”)1 significantly expanded—in some cases dramatically—sanctions against persons who deal with Iran and strengthened existing sanctions tied to the current Syrian government’s continued human rights abuses against its people. The Act also imposed new obligations on issuers that are required to file annual or quarterly reports with the Securities and Exchange Commission (“SEC”) to disclose certain activities associated with Iran and mandated procedures for the determination of whether sanctions should be imposed stemming from the disclosed activities.2 Specifically, the Act amended Section 13 of the Securities Exchange Act of 1934 (the “Exchange Act”) by adding subsection (r), which requires:
- an issuer that is required to file annual or quarterly reports with the SEC to disclose in such report certain information about activities it or any of its affiliates engaged in during the period covered by such report that are associated with Iran;
- such issuer to separately and concurrently notify the SEC about the relevant disclosure;
- the SEC to inform the President of the United States and various committees of the House of Representatives and the Senate about such disclosed activities; and
- the President to initiate an investigation for the purpose of determining whether sanctions should be imposed as a result of the disclosed activities and to make a determination not later than 180 days after the commencement of such investigation.
This memorandum summarizes these disclosure obligations and discusses other considerations that issuers covered by the Act should take into account.
Issuers Subject to the Disclosure Requirements
The disclosure requirements apply to any issuer required to file an annual or quarterly report pursuant to Section 13(a) under the Exchange Act (i.e., all issuers that have registered a security pursuant to Exchange Act Section 12), and applies to, and must be included in, any annual or quarterly report required to be filed with the SEC after February 6, 2013. In particular, the disclosure requirements apply to foreign private issuers, including those whose home jurisdictions do not restrict or prohibit business dealings with Iran. For many reporting companies with calendar year ends, the disclosure obligations will first apply to their Annual Report on Form 10-K, Form 20-F or Form 40-F, as applicable, for the fiscal year ended December 31, 2012.
Activities, Transactions and Dealings Required to be Disclosed
If an issuer or any affiliate of the issuer has engaged in or conducted any of the following activities during the period covered by the relevant annual or quarterly report being filed with the SEC, the issuer must disclose a detailed description of the nature and extent of the activity, the gross revenues and net profits, if any, attributable to the activity and whether the issuer or its affiliate intends to continue the activity:
knowingly engaging in an activity described in subsection (a) or (b) of Section 5 of the Iran Sanctions Act of 1996, as amended (the “ISA”), including:
- making certain investments that directly or significantly contribute to the enhancement of Iran’s ability to develop petroleum resources; or
- selling or providing to Iran refined petroleum products of a certain value, or selling, leasing or providing goods, services, technology, information or support of a certain value that could directly and significantly contribute to the enhancement of Iran’s ability to import refined petroleum products; or
- participating in a joint venture created on or after January 1, 2002, involving the Government of Iran, defined in the ISA to include entities owned or controlled by such, with respect to the development of petroleum resources outside of Iran (under certain conditions and with certain exceptions3); or
- selling, leasing, or providing to Iran goods, services, technology, or support of a certain value that could directly and significantly contribute to the maintenance or enhancement of Iran’s ability to develop petroleum resources located in Iran, or domestic production of refined petroleum products, including any direct and significant assistance with respect to the construction, modernization, or repair of petroleum refineries or directly associated infrastructure, including construction of port facilities, railways, and roads, the primary use of which is to support delivery of refined petroleum products; or
- selling, leasing, or providing to Iran goods, services, technology, or support of a certain value that could directly and significantly contribute to the maintenance or expansion of Iran’s domestic production of petrochemical products; or
- owning (as a controlling beneficial owner or otherwise), operating, controlling, or insuring a vessel that was used to transport crude oil from Iran to another country (with varying degrees of knowledge depending on the type of ownership/control) with certain exceptions; or
- owning (as a controlling beneficial owner or otherwise), operating, or controlling a vessel that is used in a manner that conceals the Iranian origin of crude oil or refined petroleum products transported on the vessel (with varying degrees of knowledge depending on the type of ownership/control) with certain exceptions; or
- exporting, transferring, permitting or otherwise facilitating the transshipment of any goods, services, technology or other items to any other person knowing that doing so would likely result in another person exporting, transferring, transshipping, or otherwise providing the goods, services, technology, or other items to Iran, and knowing that the export, transfer, transshipment, or other provision of the goods, services, technology, or other items to Iran would contribute materially to the ability of Iran to acquire or develop chemical, biological or nuclear weapons or related technologies or acquire or develop destabilizing numbers and types of advanced conventional weapons; or
- participating in a joint venture that involves any activity relating to the mining, production, or transportation of uranium with the Government of Iran, an Iranian entity, an entity subject to Iranian jurisdiction, or a person acting on behalf of, or owned or controlled by, the foregoing (with certain other conditions and exceptions depending on when the joint venture was formed); or
knowingly engaging in an activity described in Sections 104(c)(2), 104(d)(1) or 105A(b)(2) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, as amended (the “CISADA”), including:
with respect to Section 104(c)(2) of the CISADA, which pertains to foreign financial institutions,
- facilitating the Government of Iran to acquire or develop weapons of mass destruction or delivery systems for weapons of mass destruction or to support foreign terrorist groups or acts of international terrorism; or
- facilitating activities of persons subject to financial sanctions imposed by the United Nations Security Counsel (or a person acting on behalf of, at the discretion of, or owned or controlled by a person subject to such sanctions) that relate to Iran; or
- engaging in money laundering in furtherance of, or facilitating any Iranian financial institution to carry out, any of the foregoing activities; or
- facilitating a significant transaction or providing significant financial services for Iran’s Revolutionary Guard Corps or any of its agents or affiliates or certain persons whose property or interests in property are blocked pursuant to the International Emergency Economic Powers Act; or
- with respect to Section 104(d)(1) of the CISADA, which pertains to persons owned or controlled by U.S. financial institutions, engaging in transactions with or benefitting Iran’s Revolutionary Guard Corps or any of its agents or affiliates whose property or interests in property are blocked pursuant to the International Emergency Economic Powers Act; or
- with respect to Section 105A(b)(2) of the CISADA, transferring or facilitating the transfer of certain goods or sensitive technologies, and providing related services in connection therewith, to Iran, any entity organized under the laws of Iran or otherwise subject to the jurisdiction of the Government of Iran, or any national of Iran, for use in or with respect to Iran that the President determines are likely to be used by the Government of Iran or any of its agencies or instrumentalities to commit serious human rights abuses against the people of Iran; or
- with respect to Section 104(c)(2) of the CISADA, which pertains to foreign financial institutions,
- knowingly conducting any transaction or dealing with any person subject to certain Executive Orders relating to (i) the blocking of property and prohibiting transactions with persons who commit, threaten to commit or support terrorism or (ii) the blocking of property of those who proliferate weapons of mass destruction and their supporters; or
- knowingly conducting, without specific U.S. federal authorization, any transaction or dealing with the Government of Iran, including any political subdivision, agency or instrumentality or entity owned or controlled by the Government of Iran, any person acting on their behalf and certain other designated persons.
Notification Obligations Imposed on the Issuer and Implications
The Act also requires an issuer to provide the same information to the SEC in a separate filing made concurrently with the applicable annual or quarterly report. Upon receipt of this notice, the SEC is required to provide the relevant report to each of (i) the President of the United States, (ii) the Committee on Foreign Affairs and the Committee on Financial Services of the House of Representatives and (iii) the Committee on Foreign Relations and the Committee on Banking, Housing, and Urban Affairs of the Senate, and to publicly post the notice, which includes the relevant disclosure from the applicable annual or quarterly report, on the SEC’s website. Moreover, following the President’s receipt of the relevant annual or quarterly report containing any of the enumerated disclosures required by the Act (other than transactions or dealings required to be disclosed to the SEC solely because they are with the Government of Iran (as defined broadly pursuant to regulations) and are conducted without specific U.S. federal authorization), the Act requires the President to initiate an investigation to determine whether sanctions should be imposed pursuant to a variety of laws or by Executive Order and to make that determination not later than 180 days after the commencement of the investigation.
Other Considerations for Issuers
The new disclosure requirements are intended to compel the disclosure of activities involving Iran that could trigger sanctions against the disclosing party or its affiliates. Although the seriousness of conducting business with sanctioned nations and the severe consequences that could follow are nothing new, issuers should make sure that their organizations, in particular foreign subsidiaries and affiliates, are aware of these disclosure requirements and the potential implications involved and that any failure to timely make the required disclosures could result in the issuer violating the U.S. securities laws. In general, issuers should consider implementing some or all of the following procedures and practices to prepare for these disclosure requirements:
- conduct a thorough organization-wide analysis to determine whether the issuer or any of its affiliates has engaged in any of the activities described above, thus triggering one or more of the disclosure obligations of the Act;
- update internal disclosure controls and compliance procedures to reflect the disclosure requirements and establish new internal protocols and checks to monitor all new business dealings that the issuer or any of its affiliates may engage in so that any activities that may be required to be disclosed are prevented or surfaced promptly (these additional safeguards may include enhanced screening procedures to identify and preclude unauthorized dealings with sanctioned persons appearing on the US Treasury Department's List of Specially Designated Nationals and Blocked Persons);
- systematically extend all updated compliance protocols to affiliates of the issuer;
- train relevant compliance and operations personnel, especially those in foreign jurisdictions, on the disclosure requirements;
- make sure due diligence procedures implemented in connection with corporate transactions, such as M&A activities and joint ventures, effectively identify and elevate to the appropriate personnel within the organization any of the activities described above that a target business, joint venture partner or other third party may have engaged in; and
- to the extent an issuer engages in any activities described above, the issuer should consider, in addition to making the disclosures required by the Act, including disclosure in the form of risk factors or other cautionary disclosure that explains to investors the purpose of the disclosure, the notification process, the mandated regulatory response that will follow and the possible implications of having engaged in the activities (i.e., the imposition of sanctions).