On August 10, 2012, President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA). Among other things, this legislation provides that any company that is required to file annual or quarterly reports under Section 13(a) of the Exchange Act (which includes companies listed on a U.S. securities exchange) must disclose in those reports whether, during the period covered by the subject report, it or any affiliate has knowingly engaged in certain sanctionable activities generally relating to Iran.1
ITRA’s Disclosure Requirements. ITRA requires disclosure even when the actions did not violate any provision of U.S. law. There is no materiality threshold. The required disclosure must include a description of each such activity, specifying the nature and extent of the activity, the gross revenues and net profits attributable to the activity, if any, and whether the issuer or affiliate intends to continue the activity.
The disclosure obligation imposed by ITRA became effective for quarterly and annual reports filed after February 6, 2013, and now constitutes an ongoing reporting obligation. Public companies, even companies that concluded that they did not need to include ITRA disclosure in their most recent annual and quarterly reports, need to ensure that they have disclosure controls in place to determine each quarter whether any such disclosure is needed with respect to the period covered by the report.
ITRA imposes disclosure obligations with respect to affiliates, not just entities controlled by a public company. The Division of Corporation Finance issued a compliance and disclosure interpretation specifying that, for the purposes of ITRA, “affiliate” is defined as it is in Rule 12b-2 under the Securities Exchange Act of 1934, which covers any “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 such a broad definition applies, public companies may regularly need to determine whether any activities outside of their consolidated group are subject to disclosure under ITRA.
Recent Disclosure Practices. As of March 25, 2013, more than 125 annual or quarterly reports were filed containing ITRA disclosure, some of which were filed by related companies.2 Many disclosures reported that the activities described were conducted by non-U.S. companies, such as subsidiaries, sister companies or other affiliates. The disclosures often emphasized that the activities conducted complied with applicable law.
Some ITRA disclosures specified that the activities described were initiated by a company prior to its acquisition by the reporting issuer or that the activities occurred prior to ITRA’s enactment. In many situations, issuers disclosed a decision to cease such activities. However, some companies stated an intention to continue activities to the extent permitted by applicable law.
The breadth of the affiliate requirement led some companies with significant shareholders to disclose activities conducted by other companies in which such shareholders also had a significant investment and/or board seats. In some cases, the disclosure was accomplished by quoting the ITRA disclosure from the other company’s SEC filing. In other situations, the reporting company provided disclosures based on information received from its significant shareholder, or from the other company, noting if it had not been given specific information, such as with respect to revenues generated from the activities.
Because there is no specified location for the ITRA disclosure, companies have presented it as components of various items of the applicable report, including the business section, risk factors or legal proceedings in the applicable SEC report or separately in the “other information” item or at the end of part I of form 10-K.
Practical Considerations. It is important for each public company to design and implement, and update as needed, procedures to gather the information necessary to determine whether ITRA disclosure is required. ITRA disclosure is subject to liability under Section 18 of the Exchange Act and is covered by the CEO and CFO certifications.
Although the annual reporting season has ended for many public companies, the determination whether ITRA disclosure is required must be performed on a quarterly basis. Therefore, disclosure control procedures must encompass quarterly inquiries to determine if any activities must be reported under ITRA.
The necessary due diligence for ITRA disclosure may need to extend beyond the consolidated group for which information is typically gathered when describing the business of the company in SEC filings. Because facts and circumstances regarding share ownership and director activity vary among companies, each reporting company needs to assess what procedures it needs to conduct to ascertain that it has identified any activities in which it, or any subsidiary or affiliate, knowingly engaged and which require disclosure under ITRA.
Public companies must also recognize that the SEC’s definition of affiliate includes natural persons. Therefore, the disclosure controls for ITRA disclosure may need to encompass directors and executive officers.
It may be necessary for companies to make ITRA disclosure inquiries with respect to persons or entities that were former affiliates if they were affiliates during the period covered by the applicable report.
If ITRA disclosure is required, public companies will need to disclose their intentions with respect to continuation of such business activities. As a result, companies should consider whether to adopt policies with regard to activities governed by ITRA. If adopting a policy, consideration should be given to applying the policy prospectively only, as well as the difficulty in enforcing the policy if it is too broad. In addition, it will be important from a corporate governance perspective to adopt procedures to monitor compliance with this policy.
When performing due diligence for acquisitions, especially of those involving non-U.S. entities, companies may want to assess the extent to which the target, or any subsidiary or affiliate, has engaged in activities disclosable under ITRA that will continue after the acquisition has been closed.