In August 2012, President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012 (the IRT Act). The IRT Act significantly expands U.S. sanctions against Iran by, among other things, (i) adding new activities to the list of trigger events mandating sanctions; (ii) making U.S. companies subject to significant civil penalties if their foreign subsidiaries engage in transactions with Iran; and (iii) imposing a new disclosure requirement relating to knowing engagement in sanctionable activities by domestic and foreign private issuers required to file annual and quarterly reports with the U.S. Securities and Exchange Commission (the SEC) pursuant to Section 13(a) under the Securities and Exchange Act of 1934 (the Exchange Act).1 Section 219 of the IRT Act, which provides for the additional disclosure requirements, does not require additional rulemaking by the SEC and becomes effective on February 6, 2013. Consequently, the new disclosure provisions will apply to periodic and annual reports required to be filed with the SEC on or after February 6, 2013. For reporting companies with calendar year ends, the disclosure obligations will first apply to their Annual Report on Form 10-K, 20-F or 40-F for the fiscal year ended December 31, 2012.
Implications for Canadian Issuers
Canadian and other foreign private issuers subject to the reporting requirements of the Exchange Act must also comply with the new disclosure obligations of the ITR Act in their annual Form 40-F or Form 20-F reports, as applicable.
SEC Disclosure Relating to Sanctionable Activities
The IRT Act amended Section 13 of the Exchange Act by adding subsection (r), which requires an issuer who files annual or quarterly reports with the SEC to make specific disclosures in such reports if, during the period covered by the report, the issuer or any of its affiliates2 (including the issuer’s significant shareholders, and potentially including other parties that the issuer does not control) engaged in any of the following activities:
- Knowingly3 engaged in an activity covered by Section 5(a) or 5(b) of the Iran Sanctions Act of 1996, as amended (ISA).4
- Knowingly engaged in an activity or transaction 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 (CISADA).5
Knowingly conducted any transaction or dealing with the following persons or entities:
- Any person or entity that has property blocked pursuant to Executive Order No. 132246. Executive Order No. 13224 relates to any person or entity that is designated on the Specially Designated National and Blocked Persons List (the SDN List) as global terrorists by the Office of Foreign Asset Control7.
- Any person or entity who has property blocked pursuant to Executive Order No. 133828 which relates to any person or entity that is designated on the SDN List as a supporter and proliferator of weapons of mass destruction.
- Any person or entity defined in Section 560.304 of the U.S. Code of Federal Regulations which covers the Government of Iran, any political subdivision, agency or instrumentality of the Government of Iran, any entity owned or controlled directly or indirectly by any of the foregoing, or any person acting or purporting to act, or for whom there is reasonable cause to believe that such person is acting or purporting to act, directly or indirectly on behalf of any of the foregoing. Under this requirement, any transactions conducted without the specific authorization of a U.S. government department or agency must be reported.
If an issuer discloses that it, or one of its affiliates, has engaged in any of these activities during the relevant reporting period, the issuer is also required to provide a detailed description of such activity. Absent further guidance from the SEC, this disclosure must be made without regard to materiality of the amount or the scope or breath of the activities involved. The disclosure must include:
- the nature and extent of the activity;
- the gross revenues and net profits, if any, attributable to the activity; and
- a statement whether or not the issuer or its affiliate intends to continue the activity.
Notification Obligations Imposed on the Issuer and Implications
The ITR Act also requires a reporting issuer to provide the same information to the SEC in a separate notice filed concurrently with the applicable annual or quarterly report.9 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 post the notice publicly on the SEC's website. Following receipt of such notice, the ITR 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.
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. However, the language of the statute is very broad and covers business activities that are not necessarily sanctionable under existing U.S. sanction programs. Issuers should make sure that the appropriate individuals within their organizations, including their foreign subsidiaries and affiliates, are aware of these disclosure requirements and the potential implications involved and that any failure to make the required disclosures could result in the issuer violating the U.S. securities laws. Issuers, including senior management and disclosure committees, should consider implementing some if not all of the following procedures, policies and practices to prepare for these disclosure requirements.
- Undergo a thorough internal review of whether any of the issuer’s and/or affiliate’s activities can trigger ITR Act disclosure requirements and promptly report any ITR Act activities to the disclosure committee.
- Implement or update protocols for the issuer and its affiliates designed to identify any new business dealings that could trigger ITR Act disclosure requirements.
- Employ a systematic internal reporting process so that the correct information is accurately reported in the quarterly and annual reports, so that the acquiror can report them if required.
- Ensure that due diligence procedures in M&A activities or other cooperative ventures identify ITR Act activities that a target or partner corporation may have engaged in.
- If an issuer is reporting that it has engaged in ITR Act activities, the issuer should consider including further disclosure in the risk factors section or elsewhere regarding the potential consequences it may face as a result of those activities.
Issuers with international business operations, especially those with operations in the Middle East, should pay additional attention to these new requirements and give further consideration to the implementation of the policies and procedures noted above. The requirement to disclose any transactions or dealings with SDNs reaches activities that may be unrelated to Iran and apply to persons located anywhere in the world. All reporting issuers should consider conducting a thorough evaluation of their worldwide business activities to confirm that they do not do business with SDNs designated as global terrorists or weapons proliferators on the SDN List and should consider implementing compliance procedures (including appropriate software) to confirm that business partners and counterparties are not on the SDN List.
Click here to view Annex A
Click here to view Annex B