The Financial Times Misses The Mark In Editorial On New, SEC- Affirmed Political Risk Factors In The U.S. Capital Markets

(Washington, D.C.): In the wake of the Securities and Exchange Commission’s ground-breaking decision last week to require national security, human rights and religious freedom-related disclosure by foreign registrants doing significant business in “bad actor” countries under U.S. sanctions regimes, on 14 May The Financial Times editorially took aim at this historic SEC transparency initiative. Unfortunately, the paper largely missed the fact that the Commission’s actions were legitimate, measured, market-oriented and much-needed.

As it happens, the FT’s editorial board was compelled nonetheless to acknowledge that there were both grounds for the SEC’s decision (“There is some logic in this”) and that it was acceptable, as far as it goes. In fact, aside from carping about how the initiative was unveiled (i.e., in response to congressional correspondence that happened to come from the chairman of the subcommittee responsible for the Commission’s annual appropriations) and making apologies for two of the world’s most odious governments (those of Cuba and Iran), the paper was largely reduced to warning against an action the SEC has not taken and has shown no interest in supporting — namely, capital controls.

It behooves the prestigious Financial Times to refrain from further downplaying or besmirching the importance of the basic principle upon which the SEC was acting: Irrespective of one’s political view of sanctions regimes or the extent to which the actions of rogue nations may be destabilizing or potentially harmful to U.S. and other Western security interests, these activities can negatively impact upon the value of an implicated foreign stock or bond, and are, therefore, materially-relevant to investors. In its fevered warnings against an imagined slippery-slope towards “capital controls” — a course neither the Casey Institute and other disclosure advocates are, or have been, recommending — the FT gives short-shrift to the SEC’s appropriate effort to perform its transparency-oriented mandate. This is all the more perplexing since there is no indication that foreign firms will be penalized for their activities in U.S.-sanctioned countries, except to the extent that such a penalty is levied by more informed investors and market observers.

Securities market regulation does not often have much to do with foreign policy. Yet in the US the two have recently become awkwardly interlinked.

US companies are forbidden to do business with a certain group of countries under embargo, including Iran, Iraq, Libya, Sudan, North Korea, Burma and China. Now, the Securities and Exchange Commission plans to require foreign companies listing in the US to disclose their business interests in those countries.

According to the SEC, this action is justified on the grounds that such dealings are “likely to be significant to a reasonable investor’s decision about whether to invest in that company”.

The argument is that just as the potential costs of environmental damage, or a lawsuit, should be revealed to investors, so should the potential costs of doing business with a pariah state.

Most obviously, this means the risk that the US may extend the reach of its sanctions policy to touch foreign firms, as it has already done in a limited way with the Iran-Libya Sanctions Act. In addition, more arguably, the company could be the subject of a backlash, in Congress or among the general public, that could affect its share price.

There is some logic in this. But it is hard to see the SEC’s policy change as anything but politically motivated. It came in response to a congressional report that explicitly pushed the idea of using the financial markets as a way of making sanctions work, particularly with regard to companies doing business in Sudan.

It is also regrettable that the new policy emphasis leaked out via a letter to a congressman, rather than being publicly announced.
The affair highlights the inconsistencies in US sanctions policy. Sanctions are, at best, a blunt policy tool. At worst, they do far more harm to the ordinary people of a country than to its leader. Some of the countries on the US list, such as Cuba, are there largely for domestic political reasons, rather than because their regimes are particularly reprehensible.

In other cases, such as that of Iran, the US has been slow to change its policy to reflect the progress that has taken place. Given these problems, Congress’s determination to make the sanctions more broad-ranging appears even less justified.

So far, the SEC is demanding only greater disclosure and is not threatening to deny listings to companies doing business with the countries concerned. But the creep of foreign policy into market regulation should go no further.