Tightening Oversight over Companies Doing Business in Bad Places

By Victor Comras

Reports are surfacing that the Securities and Exchange Commission has finally begun to take action to carry out a mandate given it in the 2004 Appropriations Act (passed in November 2003) to take a more active interest in overseeing the engagement of American corporations in sanctions-designated areas overseas. This includes countries designated by the State Department as providing support to international terrorism. An Associated Press story put out today indicates that the SEC recently sent letters to US companies, and foreign companies registered in the United States requesting that they disclose any business dealings with terror-supporting countries. This disclosure request apparently also included business activities in other countries subject to US sanctions regulations. Previously, the SEC had taken a more passive stance regarding sanctions measures and terrorism-related issues. Following 9/11 the SEC Division of Enforcement commenced a review of stock and commodity trading activity undertaken prior to the 9/11 attack. They also worked with the FBI to circulate to, and obtain information from, SEC registered companies concerning any dealings they might have had with persons or entities on a confidential �control list� circulated for that purpose. But, the 2004 Appropriations Bill called on the SEC to look more closely at US business activities overseas. It also mandated the creation of a new SEC Office of Global Security Risk. There was concern that American investors might unknowingly be investing in companies with ties to countries that sponsor terrorism or that engaged in human rights violations. The Conference report to the 2004 Appropriations noted that �a company�s association with sponsors of terrorism and human rights abuses, no matter how large or small, can have a material adverse effect on a public company�s operations, financial condition, earnings, and stock prices.� The SEC was slow in setting up and staffing the new office, which only began operations with a director and two staff attorneys at the end of 2004/early 2005. SEC Chairman William Donaldson indicated to Congress several weeks ago that the Global Security Risk Office had finally chosen, and would soon procure an �online global security risk assessment product� that would help it refine its operations. This will enable the SEC to obtain and provide, in useable form, online disclosure information available to current and potential investors. In the meantime the Office has begun �to evaluate company disclosure and pursue enhanced disclosure where appropriate.� This is a subject which bears careful watching!

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