In a remarkable mingling of capital markets regulation with U.S. foreign policy considerations, Laura S. Unger, the Acting Chairman of the U.S. Securities and Exchange Commission, revealed that the SEC will be taking several steps to increase scrutiny of disclosure from overseas companies listed in the U.S. that do business with countries and entities subject to U.S. economic sanctions administered by the U.S. Treasury Department's Office of Foreign Assets Control (OFAC).
The policy announcements are considered a victory by human rights activists who seek to hinder the flow of capital from foreign companies to foreign regimes seen by activists as repressive, including countries such as Cuba, Iran, Iraq, Libya and Sudan. Activists objected when PetroChina, one of China's national oil companies, was able to offer and list shares on the New York Stock Exchange at a time when it was selling oil to Sudan. The activists claimed that the offering indirectly helped the Muslim government of the Sudan to carry out atrocities against Christians in southern Sudan. The campaign put pressure on institutional investors to boycott the PetroChina offering, which eventually raised just $2.9 billion rather than the $10 billion originally planned.
"Our aim is to make available to investors additional information about situations in which the material proceeds of an offering could - however indirectly - benefit countries, governments or entities that, as a matter of U.S. foreign policy, are off-limits to U.S. companies," Unger wrote in a letter dated May 8, 2001 to Virginia Representative Frank P. Wolf, who heads the U.S. House of Representatives subcommittee that oversees the SEC. Unger declined to pursue any action to suspend trading in PetroChina shares and those of another company as requested by Rep. Wolf.
Foreign companies contend that the SEC action Unger promised in her letter amounts to excessive government interference in the financial decisions by companies to offer and list securities in the United States. Unger's statements could have broad consequences for many foreign companies listing in the U.S., particularly energy companies that have operations in countries under U.S. embargo. Some market participants are concerned that overly cautious risk factor disclosure may unduly impede the flow of capital to some foreign companies.
The initiatives announced by Unger include:
- Heightened scrutiny of registration statements by companies doing business in countries subject to U.S. economic sanctions
Unger advised Rep. Wolf that the SEC staff will attempt to review all registration statements filed by foreign companies that reflect material business dealings with governments, countries or entities subject to U.S. economic sanctions administered by OFAC. Normally, the SEC staff exercises its discretion to perform only a selective review of non-IPO registration statements, due to limited resources.
- Enhanced disclosure for foreign registrants doing business in sanctioned countries
Unger's letter states that the fact that a foreign company is doing material business with a country, government of entity on OFAC's sanctions list is, in the SEC's staff's view, substantially likely to be significant to a reasonable investor's decision about whether to invest in that company. Accordingly, Unger wrote, the SEC staff will request information from registrants about material business in or with countries or entities with which U.S. companies would be prohibited from doing business under economic sanctions administered by OFAC. The objective of these inquiries will be to ferret out information about offerings in which the proceeds - "however indirectly" - could benefit countries or entities subject to U.S. economic sanctions.
- Prompt rulemaking to require foreign issuers to file SEC documents electronically
Foreign companies with securities listed in the U.S. are not currently required to make their SEC filings on the SEC's EDGAR system, although some do so voluntarily. Activists complain that the paper-only filings made by foreign companies are not easily accessible and that mandating electronic filings would increase scrutiny of companies doing business with sanctioned countries. Unger's letter promised prompt rulemaking that would require electronic filings by foreign companies this year.
- Inter-Agency Cooperation
Unger stated in her letter that the SEC would directly apprise OFAC of any disclosure in registration statements filed by foreign companies that reflect material business dealings with countries, governments or entities subject to U.S. economic sanctions.
A memorandum from David Martin, head of the SEC's Division of Corporation Finance, that accompanied Unger's letter, makes clear that other than mandating electronic filing, the increased scrutiny promised by Unger would be a shift in emphasis rather than a change in SEC disclosure rules, which Martin noted already require most of the disclosures demanded by activists.