The Economist Labels National Security as New Material Risk Factor In the Offerings of Foreign Firms on U.S. Capital Markets

(Washington, D.C.): A prominent article in the current issue of The Economist (below) reports that national security concerns have been identified by the Securities and Exchange Commission (SEC) as being, for the first time in history, potentially material risk factors in the investment determinations of U.S. citizens. In this connection, the magazine opines that American portfolio managers would probably be well-advised to follow suit in their “due diligence” risk assessments of foreign firms, so as not to find themselves legally vulnerable to “aggrieved shareholders.” Such a circumstance could eventuate were certain foreign securities buffeted by increasingly potent divestment campaigns, the imposition of official sanctions, negative media attention or other “blow-back” that could well accompany the presence of global “bad actors” in U.S. capital markets or firms associated with such “bad actors.”

In a slight oversight, The Economist attributes Rep. Frank Wolf’s strong opposition to the partnership of China National Petroleum Company’s (CNPC) subsidiary, PetroChina, with the odious Khartoum regime to the company “selling oil to Sudan.” Rather, it is the oil extraction and export activities of this and other foreign energy firms — often facilitated by the Sudanese government’s scorched-earth warfare — that are supplying the fundamentalist government with such destructive revenue flows.

Furthermore, The Economist’s caution against the extraterritorial implications of the new SEC disclosure measures is misplaced. On the contrary, the SEC’s new requirements stop well-short of passing any kind of political judgement on the fund-raising activities of foreign firms seeking to list in the U.S. capital markets. The measures are merely a prudent response to new risk factors in the markets linked to a demonstrated record of downside pressures on foreign securities issued by companies with operations in countries subject to U.S. sanctions regimes. The Economist also repeats the speculative concerns that the new SEC transparency guidelines could represent a “slippery slope” toward capital controls or are designed to be a subtle tightening of U.S. sanctions abroad. Fortunately, these concerns are also unfounded as will likely be made clear in the Congressional hearings on Tuesday, 22 May, related to SEC appropriations.

The Securities and Exchange Commission (SEC) has just announced new disclosure rules that expand its scrutiny of foreign firms. It will require companies seeking to sell securities in the United States to disclose their activities in countries subject to American government sanctions–places like Cuba, Iraq and Sudan. Depending on how fund managers and allies react, says Roger Robinson, head of the William J. Casey Institute, the initiative could have “ground-breaking foreign-policy implications”. His think-tank has long agitated to have problems of national security, human rights and religious freedom treated as investment risks.

The new interpretation changes the way in which the SEC enforces its requirement to disclose anything that makes an offering risky or speculative. In the past, that has applied to, say, environmental risks or lawsuits, but not to political risk or national security. Now it will [emphasis ours].

The change was announced in a peculiar way: in a letter from the SEC’s acting chairman, Laura Unger, to Frank Wolf, who chairs the House subcommittee responsible for the SEC’s annual funding. Mr Wolf was furious that PetroChina, one of China’s national oil companies, was able to seek a New York listing last year at a time when it was [extracting] oil [from] Sudan. Mr Wolf thinks this helped the Muslim government to carry out atrocities against Christians in southern Sudan.

A slippery slope, it seems. America might seek to extend its sanctions regimes–such as the controversial Helms-Burton act–in an extraterritorial direction, in effect, by imposing capital controls on companies that congressmen dislike. It is unclear what the SEC will do with information that a firm trades with, say, Sudan or Iraq. It would rather pass this hot potato to an inter-agency group that would include the State Department and the Treasury to deal with hard cases. Such a group could recommend that the president use his powers to halt listings on grounds of national security.

The new rules could affect foreign firms in a more evolutionary way. They may force American portfolio managers to take account of newly revealed political risks, or face lawsuits from aggrieved shareholders. If so, market caution could end up extending America’s sanctions regime in a way that no amount of government posturing could achieve [emphasis ours].