SEC Staff Publishes C&DIs Regarding Disclosure Requirements for Issuers Engaged in Certain Activities in Iran

December 7, 2012


Background on the Threat Reduction Act

The Iran Threat Reduction and Syria Human Rights Act of 2012 (the “Iran Threat Reduction Act”) introduced a broad range of measures that both expand existing Iranian and Syrian sanctions and introduced new mechanisms designed to further thwart Iran’s nuclear program and support of terrorism. One of these new measures is Section 219 of the Iran Threat Reduction Act, which imposes significant new mandatory disclosure requirements on issuers that engage in certain activities in Iran. Specifically, Section 219 added new Section 13(r) to the Securities Exchange Act of 1934, which requires issuers required to file reports under Section 13(a) of the Exchange Act to disclose certain activities related to Iran. The disclosure requirements apply to a broad range of activities that focus on the Iranian energy sector, its nuclear and ballistic missile programs, and support for terrorism. Key examples of activities subject to disclosure include:

  • knowingly conducting any transaction or dealing with a person whose property and interests in property are blocked pursuant to various Iran-related Executive Orders,
  • aiding in the development of Iran’s petroleum resources, production of refined petroleum products, and the importation of refined petroleum products into Iran, and
  • facilitating Iran’s efforts to develop or acquire weapons of mass destruction or Iran’s support for terrorism.

If an issuer (or its affiliate) engages in any of the activities enumerated in Section 13(r), it must provide disclosure regarding:

  • the nature and extent of the activity,
  • any gross revenues and net profits attributable to the activity, and
  • whether the issuer, or its affiliate, intends to continue the activity.

In addition, if such disclosure is required by Section 13(r), the Issuer must provide a separate notice to the Commission that these disclosures are included in its annual or quarterly report. This notice must be made concurrently with the applicable annual or quarterly report and must include the relevant disclosure. The Commission is required by Section 13(r) to then transmit that notice to the President and the Congress and make the notice publicly available on the SEC’s website. Upon receipt of the notice, the President must initiate an investigation into the possible imposition of sanctions under the Threat Reduction Act’s predecessors, the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 and the Iran Sanctions Act of 1996.

Issuers should consider Section 13(r) disclosure in light of the increased scrutiny by the SEC’s Office of Global Security Risk (“OGSR”) of issuers’ activities related to countries designated by the U.S. Department of State as “state sponsors of terrorism” (Cuba, Iran, Sudan, and Syria). In general, OGSR has sought additional disclosure regarding these activities through the comment process even when the activities would not otherwise appear to be material. In seeking this additional disclosure, it appears that OGSR is of the view that all business activities involving countries on the “state sponsors of terrorism” list are qualitatively material. Therefore, issuers that engage in the activities subject to the mandatory disclosure requirements of Section 13(r) should also be mindful of OGSR’s position with respect to disclosures related to sanctioned countries generally. That position could have implications for any activity in Iran and other terrorism-supporting countries (not only the types of activity enumerated in Section 13(r)).

New Compliance and Disclosure Interpretations

On December 4, 2012, the Commission released seven new Compliance and Disclosure Interpretations regarding the disclosure requirements of Section 13(r) (available here). The following is a brief summary of each C&DI.

  • Question 147.01 — Any periodic report with a due date after February 6, 2013, regardless of when such report is filed with the Commission, is required to comply with the disclosure requirements of Section 13(r). For example, a Form 10-K filing for a large accelerated filer due on March 1, 2013, is required to comply with the disclosure requirements of Section 13(r) even if such report is filed prior to February 6, 2013.
  • Question 147.02 — Issuers are required to disclose all activities specified in Section 13(r)(1) of the Exchange Act that occurred during the period covered by the periodic report, even if such events occurred prior to the enactment of the Threat Reduction Act on August 10, 2012. For example, an issuer filing a Form 10-K for the fiscal year ended December 31, 2012, will be required to disclose any activities specified in Section 13(r)(1) from January 1, 2012 through December 31, 2012.
  • Question 147.03 — The term “affiliate” in Section 13(r) is as defined in Exchange Act Rule 12b-2. Exchange Act Rule 12b-2 defines an “affiliate” as “a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.”
  • Question 147.04 — No disclosure, negative or otherwise, is required if neither an issuer nor any of its affiliates has engaged in any activity described in Section 13(r) during the period covered by the report.
  • Question 147.05 — An issuer may omit disclosure of an otherwise disclosable transaction or dealing under Section 13(r)(1)(D)(iii) only if such transaction or dealing has received “specific authorization of a Federal department or agency.” Specific authorization from a non-US governmental authority of a disclosable transaction or dealing does not permit issuers to omit the disclosure required under Section 13(r)(1)(D)(iii); however, issuers may disclose such foreign authorization so as to give the disclosure appropriate context.
  • Question 147.06 — Both general licenses (authorizing a particular type of transaction) and specific licenses (authorizing a specific transaction) issued by the Office of Foreign Asset Control of the US Department of the Treasury constitute “specific authorization of a Federal department or agency” under Section 13(r)(1)(D)(iii), provided that all conditions of the applicable license are strictly observed.
  • Question 147.07 — Any disclosure made pursuant to Section 13(r) in a periodic report will become public automatically upon filing such report on the Commission’s EDGAR system.

Implications of New Disclosure Requirements

With limited exceptions, U.S. companies have been virtually barred from doing business in or with Iran under long-standing sanctions laws. Since 2010, a series of legislative and presidential initiatives have targeted the activities of non-U.S. persons in Iran. Like the existing laws and regulations on which they build, the new measures in the Iran Threat Reduction Act, including new Section 13(r) of the Exchange Act, reflect a strong U.S. political sentiment that non-U.S. persons should be held accountable for their Iranian-related activities if they are to be allowed to participate in the U.S. economy.

The Section 13(r) disclosure requirements will have more impact on non-U.S. companies that are issuers in the United States because U.S.-based issuers (which now includes the foreign subsidiaries of U.S. companies under a separate provision of the Iran Threat Reduction Act) are prohibited from engaging in the activities that are subject to this new disclosure rule.

Issuers that have any business activities related to Iran, however minor, should consult with disclosure counsel to determine if these new requirements are triggered. If applicable, and depending on the level of activity in question, meeting the disclosure requirements could involve significant data gathering.

For questions, please contact the attorneys listed above or your O’Melveny & Myers advisor.