Worldwide: A Primer For New Iran-Related Disclosures: Correspondence By The SEC’s Office Of Global Security Risk

As companies, including foreign private issuers, evaluate the scope and level of detail that the recently enacted Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRSHRA) requires in SEC filings,¹ they may want to consider examples from published comment-letter correspondence triggered by the SEC's Office of Global Security Risk (OGSR). OGSR is an office within the Division of Corporation Finance. For nearly a decade, OGSR has been monitoring disclosures related to business activities involving U.S.-sanctioned countries, as well as prompting additional disclosures from issuers about those activities (or the lack thereof).

For example, in August 2012, International Business Machines Corp. received a comment letter from OGSR asking the company to address news reports that a Chinese company was selling IBM products to Iran, as well as reports of a Department of Commerce investigation into that same Chinese company.² The letter also requested a general update on IBM's contacts with Syria, Sudan, and Cuba. IBM's detailed response prompted a reply by OGSR confirming that its inquiry had ended. Then, consistent with SEC policy to publish comment letters to the EDGAR public filings database as quickly as 20 business days following the SEC staff's completion of a filing review,³ all of this correspondence was made available to the public.

IBM's correspondence is just one example of correspondence with OGSR that can serve as a reference for new ITRSHRA disclosures. Although OGSR's comments to date have focused on a materiality standard and ITRSHRA requires disclosure of otherwise immaterial activities involving Iran, published OGSR correspondence may provide helpful guidance as companies evaluate how to address, and how to present sufficient context to help the SEC and investors understand, the newly required disclosures.

After describing the context in which OGSR was created and now functions, this article highlights several other examples, discussing how OGSR monitors disclosures in SEC filings concerning business conducted with and in sanctioned countries.

Office of Global Security Risk

The Office's Origins

OGSR was created in 2004, at the direction of Congress, with a mission to monitor and then seek disclosure from companies that appear to be doing business in sanctioned countries.⁴ In a report accompanying an appropriations bill for the fiscal year ending in 2004, the House Committee on Appropriations stated that it believed "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, all of which can negatively affect the value of an investment."⁵ Citing the protection of American investors, the Committee directed the SEC to create an Office of Global Security Risk within the Division of Corporation Finance that would:

Today, OGSR's website states that it works closely with the Division of Corporation Finance to "monitor whether the documents public companies file with the SEC include disclosure of material information regarding global security risk-related issues."⁷ Evidence of OGSR's activity confirms that affiliation. Dozens of household-name companies have received letters from OGSR in recent years, asking the companies to detail contacts with sanctioned countries – including Iran – and essentially to justify the prior lack of disclosure by explaining why those contacts were not material.⁸

How It Works, What They Watch For

A company's first contact with OGSR typically comes in the form of a comment letter on a recent periodic SEC filing.

TripAdvisor, Inc.'s inquiry began, for example, with a letter commenting on the company's Form 10-K for the 2011 fiscal year.⁹ "We note that your website enables visitors to book flights to and from Iran, Sudan, and Syria," OGSR wrote in its letter this past summer. The letter asked TripAdvisor to describe the nature and extent of the company's past, present, and anticipated contacts with each of the three countries. It also asked TripAdvisor to discuss whether those contacts "constitute a material investment risk for your security holders."

The fact that an office within the SEC's Division of Corporation Finance wrote to a company based on its independent review of the company's website should not be a surprise. A review of initial OGSR comment letters suggests that OGSR regularly uses a few common sources to monitor companies for undisclosed business with or in sanctioned countries:

Based on these information sources, OGSR typically asks companies to explain their past, present, and anticipated contacts with the sanctioned countries implicated in that evidence. The letters then ask for a discussion of why those contacts were not sufficiently material to include in an SEC Form 10-Q or 10-K.

OGSR typically copies on its letters the Division of Corporation Finance assistant director whose staff members routinely monitor the company's filings. When pharmaceutical companies are contacted, for example, OGSR may copy the Office of Health Care and Insurance. For online travel websites, the Office of Computers and Online Services might be included.

How Companies Respond

Companies' responses to OGSR comment letters have varied in their complexity and specificity. Some have won quick replies when OGSR concluded a company's first response was sufficient to answer its questions. Others have received follow-up questions from OGSR, seeking to drill down on certain insufficiently explained contacts. Ultimately, many companies contacted by OGSR successfully assert that their contacts with sanctioned countries were not material – that they were too minimal to merit disclosure and that failing to disclose them would not have been important enough to change investors' willingness to invest in the company's securities. The irony, of course, is that, in providing this explanation, the company "discloses" (through publication of its correspondence with OGSR) the additional immaterial, but potentially interesting, information it initially concluded was not required in its filings.

TripAdvisor's response is an example of satisfying OGSR's questions with one concise explanation, a result many companies would prefer. TripAdvisor responded to OGSR's inquiry with a four-page letter conceding upfront that it did, indeed, provide certain travel information and services to or relating to Iran, Sudan, and Syria.¹⁴ The company explained, however, that the information and services were "covered by exemptions to the applicable sanctions, as administered by the Office of Foreign Assets Control." To address whether this business was quantitatively material, TripAdvisor showed that its aggregate revenue associated with these three countries accounted for 0.012% or less of the Company's overall consolidated revenues during recent years. As to qualitative materiality, TripAdvisor stated it did not believe a reasonable person would consider the "limited business" to be material, it had not received any investor inquiries on the issue, and it did not believe the company would be affected by states, endowments, or other institutional investors that vowed not to invest in companies doing business in sanctioned countries.¹⁵ Less than three days later, OGSR sent TripAdvisor a one-page letter stating that it had completed its review of the matter.

St. Jude Medical similarly explained in a four-page letter how its limited interaction with sanctioned countries complied with relevant sanctions and was conducted under the appropriate licenses where required to do so.¹⁶ St. Jude Medical addressed quantitative materiality by including a bulleted list comparing revenues associated with Iran and Syria to those of the overall company. It then reiterated its products' "humanitarian nature" and explained succinctly its view that a reasonable investor would not find its actions in these countries to be qualitatively material. Becton Dickinson, another medical products company, explained in a six-page letter that it derived only small amounts of revenue from interactions with and in sanctioned countries based on appropriate licenses from the U.S. government.¹⁷ Becton Dickinson also explained that related sales amounted to less than 0.1% of combined sales during the prior three years and that the "humanitarian nature" of its products and limited interaction with sanctioned countries prevented any material effect on its reputation or material investment risk to its shareholders. Both of these companies received closing letters from OGSR after sending only one response to OGSR's questions. Priceline was also successful in achieving a closing letter, though it requested and was granted an extension of time to file its response.¹⁸ Priceline's response was nine pages long and included more detail than those of TripAdvisor, St. Jude Medical, and Becton Dickinson. The additional length stemmed largely from including charts that compared additional financial results from interactions with and in sanctioned countries.

Honeywell's 2011 correspondence with OGSR, however, shows that OGSR staff will sometimes use follow-up questions to drill down on what it believes are unaddressed issues. In its first response, Honeywell stated that it had decided in 2008 to "cease doing business in Sudan" and that it had committed in 2010 to "accept no new business in Iran."¹⁹ Noting, however, that Honeywell still listed 2011 revenues from Iran in the company's response, OGSR followed up with a second comment letter. The follow-up comment letter asked Honeywell to explain, among other things, any "ongoing legacy or other business" in Iran or Sudan or "remaining contractual obligations with respect to business in those countries."²⁰ The follow-up comment letter also asked whether such remaining business involved products or services for refinery and petrochemical applications and whether the company sold any non-licensed products or services listed on the Commerce Control List. Honeywell replied that it had no ongoing legacy or other business in Sudan and that its ongoing contractual obligations in Iran were not related to refinery or petrochemical applications.²¹ While one of Honeywell's subsidiaries was initially expected to provide certain products and services for refining and petrochemical applications, that subsidiary had "ceased performance under these agreements," the company stated. According to Honeywell, none of its products or services was on the Commerce Control list, except for those specifically licensed by the Department of Commerce. OGSR sent Honeywell a closing letter ten days after the company submitted its follow-up response.

Honeywell's correspondence also highlights the potential for OGSR to ask companies directly how they anticipate newly enacted sanctions will affect the company's business going forward. OGSR's initial comment letter asked Honeywell to address specifically how provisions in the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA) "will impact or have impacted your business" – especially "relating to contracting with the U.S. government." Honeywell responded that it had "been able to make all required certifications under the Act without qualification" and that "there has been no impact to Honeywell's U.S. government contracting business." This response was apparently sufficient, as the OGSR follow-up letter did not ask any further questions on this issue.

With ITRSHRA enacted in August 2012, OGSR has asked at least one company a similarly pointed question about how it complies with these new Iran sanctions. OGSR's September 28, 2012 comment letter to Teekay Tankers Ltd. asked the company to discuss, among other things, the impact of "the Iran Threat Reduction and Syria Human Rights Act of 2012 on your company and business operations."²² Teekay Tankers responded that ITRSHRA did not and would not have a significant impact on the company and its business operations because Teekay Tankers and third-party vessels participating in the company's revenue-sharing and commercial pooling arrangements were in compliance with ITRSHRA. Teekay Tankers' response stated: "No vessels owned or chartered-in by the Company or third party vessels during their participation in the Pooling Arrangements are used to transport crude oil from Iran to another country nor does the Company engage in the specific activities for which ITRSHRA requires SEC disclosure."²³ OGSR sent Teekay Tankers a letter about three weeks later confirming that it had completed its review and had no further questions.

ITRSHRA's Disclosure Requirements

With OGSR already reviewing disclosures of business with and in sanctioned countries – including Iran – OGSR is likely to spearhead, or at least help manage, the SEC's efforts to monitor disclosure requirements enacted with the new Iran sanctions.

The main SEC-reporting change enacted with the new sanctions is the removal of a "materiality" threshold for disclosures about certain Iran-related business. Section 219 of ITRSHRA amended the Securities Exchange Act of 1934 to require issuers whose stock is traded on U.S. exchanges to disclose whether they or their affiliates have knowingly engaged in activities:

If an issuer company or its affiliates have knowingly engaged in any of these business activities, then the company is required to disclose a "detailed description of each such activity," including the "nature and extent of the activity," the "gross revenues and net profits" from the activity, and whether the issuer or its affiliate "intends to continue the activity."²⁵ Disclosing sufficient context for the activity will be very important to help readers understand relevant facts, such as humanitarian activities that are consistent with the spirit of, but are not expressly authorized by, applicable law. Along with making this disclosure, an issuer also would have to file a separate notice with the Commission stating that the Iran-related disclosure was in its SEC filing.²⁶ If the SEC receives such a notice, it must send the notice to the President, the House Committee on Foreign Affairs, the House Committee on Financial Services, the Senate Committee on Foreign Relations, and the Senate Committee on Banking, Housing, and Urban Affairs. The SEC is then required to post the disclosure and notice on the Commission's website. ITRSHRA also provides that the President must investigate whether sanctions should be imposed on the issuer company.

Foreign Private Issuers

As noted above, part of OGSR's mandate is to evaluate U.S.-listed foreign companies to make sure they disclose business in countries sanctioned by the United States.

For example, Canadian Imperial Bank of Commerce (CIBC) has received comment letters from OGSR at least three separate times. CIBC was first contacted in June 2006. OGSR stated that "public media sources" and "third-party websites" showed CIBC had "operations in, or accounts associated with, Cuba and Iran" and that the company's Form 40-F for the most recent fiscal year did not contain information about those contacts.²⁷ CIBC received another OGSR comment letter in September 2010, stating that "some travel sites" indicated that CIBC handled wire transfers to Cuba, that the CIBC Visa could be used in Cuba, and that a recent SEC filing listed the Canadian Iranian Foundation as an organization CIBC supported in British Columbia.²⁸ CIBC received another OGSR comment letter in April 2012, requesting more information about CIBC disclosures regarding "financial exposures to Middle Eastern countries including Syria."²⁹ In each instance, CIBC responded to address OGSR's questions, and the correspondence file became part of the public record.

Being a foreign private issuer does not absolve a company of OGSR monitoring. Indeed, CIBC mentioned the fact that it was a foreign private issuer in its response to the 2006 OGSR inquiry, ³⁰ yet OGSR continued to monitor the company for potential contacts with sanctioned countries.³¹

Applying OGSR Correspondence to ITRSHRA Disclosure

Companies required to make ITRSHRA disclosures must do so starting with annual or quarterly reports due to be filed after February 6, 2013.³² The SEC on December 4, 2012 issued its first guidance on how to comply with these new disclosure requirements. The guidance, styled as Compliance and Disclosure Interpretations, did not address exactly what would satisfy the statute's call for a "detailed description" of the "nature and extent of the activity." With the initial deadlines approaching, the SEC might not give further guidance before companies must make ITRSHRA disclosures in their upcoming annual or quarterly reports.

In the absence of more detailed guidance from the SEC, the record of companies' prior correspondence with OGSR offers some indications for the level of detail issuers may consider including in SEC filings to meet these ITRSHRA requirements. OGSR is well positioned to monitor issuers for potentially undisclosed business with or in Iran, as well as to continue monitoring for material business operations with or in sanctioned countries, even when the new disclosure obligations are not triggered. Because ITRSHRA requires disclosure of even activity otherwise well below the materiality threshold addressed in prior OGSR correspondence, knowing what OGSR has viewed as important to date will be critical to crafting effective ITRSHRA disclosure.

Footnotes

^{1 For a summary of the bill, see the Fried Frank Client Memorandum " New US Sanctions Law Increases Risks for Doing Business with Iran," published August 15, 2012. For a focus on the SEC-disclosure aspects of ITRSHRA, see the Fried Frank Client Memorandum " SEC Disclosure Obligations of Certain Activities Associated with Iran," published October 26, 2012. For an explanation of the SEC's guidance on making those disclosures, see the Fried Frank Client Memorandum " SEC Issues Initial Guidance on Obligation to Disclose Certain Activities Associated with Iran," published December 11, 2012. The SEC recently notified issuers that notices required by ITRSHRA should be submitted via EDGAR on a new form type called IRANNOTICE, which should be available for use January 14, 2013. Securities and Exchange Commission, " Notice required by the Iran Threat Reduction and Syria Human Rights Act of 2012 to be filed through EDGAR" (Dec. 19, 2012).}

^{2 See OSGR's initial August 24, 2012 comment letter to IBM's Form 10-K for the Fiscal Year Ended December 31, 2011; IBM's September 10, 2012 response letter; and OGSR's September 25, 2012 closing letter confirming completion of its review.}

^{3 Securities and Exchange Commission, " SEC Staff to Release Filing Review Correspondence Earlier" (Dec. 1, 2011). 4 OGSR was funded through the Consolidated Appropriations Act of 2004, Pub. L. No. 108-199, 118 Stat. 3, 90 (2004). A description of OGSR is included in the REPORT TO ACCOMPANY THE DEPARTMENTS OF COMMERCE, JUSTICE, AND STATE, THE JUDICIARY, AND RELATED AGENCIES APPROPRIATIONS BILL, FISCAL YEAR 2004, H.R. REP. NO. 108-221, at 151 (2003), and was incorporated by reference into the CONFERENCE REPORT ON PUB. L. NO. 108-199. See H.R. REP. NO. 108-401, at 639 (2004) (Conf. Rep.).}

^{5 REPORT TO ACCOMPANY THE DEPARTMENTS OF COMMERCE, JUSTICE, AND STATE, THE JUDICIARY, AND RELATED AGENCIES APPROPRIATIONS BILL, FISCAL YEAR 2004, H.R. REP. NO. 108-221, at 151 (2003).}

^{6 Id.}

^{7 Securities and Exchange Commission, "Office of Global Security Risk" (Mar. 2, 2005).}

^{8 Several sets of correspondence were conducted with issuers during the final months of 2012. For examples of initial comment letters to household-name issuers, see OGSR's initial September 28, 2012 comment letter to General Dynamics Corp.'s Form 10-K for the Fiscal Year Ended December 31, 2011; OGSR's initial September 28, 2012 comment letter to Marriott International, Inc.'s Form 10-K for the Fiscal Year Ended December 30, 2011; OGSR's initial September 27, 2012 comment letter to H.J. Heinz Co.'s Form 10-K for the Fiscal Year Ended April 29, 2012; OGSR's initial September 14, 2012 comment letter to The Boeing Company's Form 10-K for the Fiscal Year Ended December 31, 2011; and OGSR's initial September 6, 2012 comment letter to Hewlett-Packard Company's Form 10-K for the Fiscal Year Ended October 31, 2011. 9 See OGSR's initial June 15, 2012 comment letter to TripAdvisor's Form 10-K for the Fiscal Year Ended December 31, 2011; TripAdvisor's June 26, 2012 request for an extension of time to file a response; TripAdvisor's July 17, 2012 substantive response letter; and OGSR's July 20, 2012 closing letter confirming completion of its review.}

^{10 See OGSR's initial September 15, 2010 comment letter to St. Jude Medical's Form 10-K for the Fiscal Year Ended January 2, 2010; St. Jude Medical's September 28, 2010 response letter; and OGSR's October 1, 2010 closing letter confirming completion of its review.}

^{11 See OGSR's initial November 30, 2011 comment letter to Priceline's Form 10-K for the Fiscal Year Ended December 31, 2010; Priceline's December 6, 2011 request for an extension of time to file a response; Priceline's January 31, 2012 substantive response letter; and OGSR's February 8, 2012 closing letter confirming completion of its review.}

^{12 See OGSR's initial June 9, 2011 comment letter to Honeywell's Form 10-K for the Fiscal Year Ended December 31, 2010; Honeywell's first response letter, dated July 8, 2011; OGSR's July 22, 2011 comment letter with follow-up questions; Honeywell's second response letter, dated August 5, 2011; and OGSR's August 15, 2011 closing letter confirming completion of its review.}

^{13 See OGSR's initial September 8, 2011 comment letter to Becton Dickinson's Form 10-K for the Fiscal Year Ended September 30, 2010; Becton Dickinson's October 14, 2011 response letter; and OGSR's November 1, 2011 closing letter confirming completion of the review. 14 TripAdvisor's July 17, 2012 substantive response letter.}

^{15 OGSR's comment letters typically ask issuers to consider in their materiality analysis the trend among institutional investors to divest themselves of the securities issued by companies doing business in sanctioned countries.}

^{16 St. Jude Medical's September 28, 2010 response letter.}

^{17 Becton Dickinson's October 14, 2011 response letter.}

^{18 Priceline's January 31, 2012 substantive response letter. 19 Honeywell's first response letter, dated July 8, 2011.}

^{20 OGSR's July 22, 2011 comment letter with follow-up questions for Honeywell.}

^{21 Honeywell's second response letter, dated August 5, 2011.}

^{22 See OGSR's initial September 28, 2012 comment letter to Teekay Tankers' Form 20-F for the Fiscal Year Ended December 31, 2011; Teekay Tankers' October 26, 2012 response letter; and OGSR's November 15, 2012 closing letter confirming completion of its review. In a separate set of correspondence, the Division of Corporation Finance also asked Seadrill Partners LLC to expand disclosure in its Form F-1 filing to discuss the potential impact of ITRSHRA. See the September 11, 2012 comment letter to Seadrill's Revised Confidential Draft Registration Statement on Form F-1 Submitted August 20, 2012.}

^{23 Teekay Tankers' October 26, 2012 response letter. 24 As summarized in the Congressional Record from Senate consideration of the bill. The Fried Frank Client Memorandum "SEC Disclosure Obligations of Certain Activities Associated with Iran," to which a link is provided above, gives a thorough explanation of the new disclosure requirements.}

^{25 Securities Exchange Act of 1934 § 13(r)(2).}

^{26 As noted above, such notices will be submitted via EDGAR on a new form type called IRANNOTICE, which should be available for use January 14, 2013.}

^{27 OGSR's initial June 30, 2006 comment letter to CIBC's Form 40-F for the Fiscal Year Ended October 31, 2005.}

^{28 OGSR's initial September 30, 2010 comment letter to CIBC's Form 40-F for the Fiscal Year Ended October 31, 2009.}

^{29 OGSR's initial April 5, 2012 comment letter to CIBC's Form 40-F for the Fiscal Year Ended October 31, 2011. 30 CIBC's August 14, 2006 response letter ("With respect to qualitative factors that a reasonable investor would deem important in making an investment decision, we note that CIBC is a company organized in and with its principal offices in Canada. CIBC is a foreign private issuer and the majority of its holders of record are not residents of the U.S.").}

^{31 For additional examples of recent OGSR comment letters to foreign private issuers, see OGSR's initial November 6, 2012 comment letter to Braskem S.A.'s Form 20-F for the Fiscal Year Ended December 31, 2011; OGSR's initial September 26, 2012 comment letter to CNH Global N.V.'s Form 20-F for the Fiscal Year Ended December 31, 2011; and OGSR's initial August 1, 2012 comment letter to China Southern Airlines Company Ltd.'s Form 20-F for the Fiscal Year Ended December 31, 2011.}

^{32 The SEC's December 4, 2012 guidance clarified that ITRSHRA disclosures are required for all reports normally due after February 6, 2013, notwithstanding whether those reports are filed ahead of the deadline for 2013.}

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