Their Finest Hour’: Financial Times Describes Emerging Forces in Global Finance and National Security/Human Rights Nexus

(Washington, D.C.): In a truly remarkable forty-eight hour period, the process by which foreign registrants access the vast, globally-dominant U.S. debt and equity markets has been transformed: Henceforth, national security, human rights and religious freedom will be viewed by the Securities and Exchange Commission (SEC) as potentially material risks to U.S. and other investors, thereby requiring new echelons of disclosure and transparency.

These changes are chronicled in a front-page article by Ted Alden in today’s Financial Times entitled “SEC Seeks Closer Watch on Overseas Groups” and additional reporting inside the paper. Reduced to its essence, the FT concludes that “The move [to evaluate these new categories of “political risk”]…marks an unprecedented mixing of capital markets regulation with U.S. foreign policy concerns” (emphasis ours).

Much of the impetus for this breakthrough in non-financial risk assessment in the markets was catalyzed by one of our nation’s most inspired and tenacious advocate of human rights, religious freedom and a quick end to the genocidal catastrophe presently underway in Sudan, Rep. Frank Wolf (R-VA). Mr. Wolf was among the first lawmakers to recognize the substantial policy leverage offered by selective action on the U.S. capital markets. In so doing, he relied heavily on the prodigious five-year effort of the William J. Casey Institute –and its Chairman, Roger Robinson, and Senior Analyst Adam Pener — to strengthen SEC disclosure and transparency requirements with respect to known or prospective global “bad actors” seeking to raise funds in our debt and equity markets.

Regrettably, these prudent, market-oriented initiatives were staunchly resisted by former SEC Chairman Arthur Levitt for more than three years. His departure, however, allowed the Commission’s staff and interim leadership to take a more rigorous — and conscientious — approach to the oversight of potentially problematic foreign offerings.

Just how problematic such offerings might be was recently presented by the Casey Institute to board members of leading American pension funds. As noted in this memorandum: “We believe the public pension funds have a fiduciary responsibility to determine whether a company’s — or a country’s — domestic or overseas activities will negatively affect the value of the fund’s investments. Indeed, there is abundant evidence to assert that national security and human rights concerns have emerged as new risk factors in the markets.”

In its correspondence, the Casey Institute recommended that “Pension funds can and should include [national security-, human rights- and religious freedom-related] considerations in their risk assessment of overseas companies.” Happily, this view has now been adopted by the Securities and Exchange Commission which has explicitly called for such new risk elements to be incorporated into the due diligence processes of fund managers. As Mr. Alden noted, “the decision will also put new pressure on mutual funds and pension funds to expand their assessments of the political risks of investing in certain companies.”

The Casey Institute applauds Acting SEC Chairman Laura Unger and David Martin, Director of Corporation Finance, for their vision and leadership in addressing these new areas of potential market peril for largely unwitting American and other investors. It is to be hoped that Harvey L. Pitt, President Bush’s newly announced choice for the SEC chairmanship, will strongly support the detailed adjustments recommended by the SEC staff to assure needed transparency and discipline with respect to foreign offerings on the U.S. debt and equity markets, as outlined in Ms. Unger’s letter to Representative Wolf of May 8. Mr. Pitt’s views on this emerging issue area — and especially their consistency with the Unger standards — should feature prominently in his upcoming confirmation hearings.

The US Securities and Exchange Commission is planning to demand sharply increased disclosure from overseas companies listed in the US that are doing business with countries under US embargo.

The move, which comes as the Bush administration on Thursday announced plans to nominate Harvey L. Pitt as SEC chairman, marks an unprecedented mixing of capital markets regulation with US foreign policy concerns.

It is spelt out in a May 8 letter from Laura Unger, acting SEC chairman, to Frank Wolf, the Republican who chairs the House of Representatives appropriations sub-committee responsible for the SEC.

In the letter, obtained by the Financial Times, Ms Unger says the SEC will now require overseas companies to disclose if they are doing business in any country where US companies would be prohibited from investing. These include Iran, Iraq, Libya, Sudan, North Korea, Burma and Cuba. The embargo also embraces some companies targeted for weapons proliferation.

Ms Unger wrote: “Our aim is to make available to investors additional information about situations in which the material proceeds of an offering could – however indirectly – benefit countries, governments, or entities that, as a matter of US foreign policy, are off-limits to US companies.”

The commitments are spelt out as initiatives to be carried out by the SEC staff, and are accompanied by a detailed staff memorandum. Except for a small change requiring electronic filing by overseas companies, the move does not demand a formal rule but can be implemented under existing SEC authority.

The SEC action responds to a growing campaign by human rights groups aimed at restricting the ability of companies doing business in war-racked Sudan to raise money on US markets.

Mr Wolf demanded last month that the SEC suspend trading in the stock of PetroChina and Talisman Energy, the Chinese and Canadian oil companies. PetroChina’s parent company is the largest investor in a consortium extracting oil in Sudan. Talisman holds a smaller share.

Mr Wolf claimed both companies had failed to disclose to investors the risks of their involvement in Sudan.

Ms Unger said the SEC had no authority to deny US listings because of a company’s involvement with any particular foreign country, but would require fuller disclosure of these investments.

The SEC, which normally does only selective reviews of disclosure filings, said it would attempt to review all registration statements filed by overseas companies with business in embargoed countries.

The SEC would work closely on the issue with the Office of Foreign Assets Control, the Treasury agency that administers US economic sanctions. The SEC “fully supports duly imposed economic sanctions and will co-operate with appropriate US governmental agencies to help ensure that those sanctions are enforced”, the letter said.

Laura Unger, the acting chairman of the US Securities and Exchange Commission, has handed a bombshell to her successor Harvey L. Pitt.

Mr Pitt, who was nominated yesterday by President George W. Bush to head the SEC, will be given the task of implementing a decision that significantly expands the SEC’s role in ensuring that foreign companies listing in the US do not run foul of US sanctions policy.

The decision was conveyed in a letter this week from Ms Unger to Rep. Frank Wolf, who chairs the House appropriations subcommittee with authority over the SEC and is co-chair of the House human rights caucus. The SEC, under its existing authority to require full disclosure, has declared that investments in countries under US sanctions are a significant material risk to investors.

While the US government has never been shy about using sanctions as a foreign policy tool, there has been great reluctance, particularly from the US Treasury, to link these measures in any way to the US capital markets. The fear is that companies could choose to list elsewhere if they believe US markets are tainted by political considerations.

The SEC’s move “could represent a sea change in the way in which foreign registrants access the US capital markets,” said Roger W Robinson Jr, chairman of the William J Casey Institute, a Washington policy group with close ties to conservative groups and human rights activists.

“National security, human rights and religious freedom concerns are now regarded as potential material risks to investors,” said Mr Robinson, who was a senior National Security Council official in the Reagan administration.

While companies are already required in general terms to disclose political risks, the new requirements are much more targeted. US-listed companies must now spell out their dealings in places such as Iran, Iraq, Libya, Sudan, Burma and Cuba, and the SEC has promised aggressive oversight to ensure that US investors are fully aware of the risks they are taking in buying stocks or bonds in such companies.

In a memorandum from David Martin, the director of corporate finance, the SEC says that such risks are not limited to the possibility that US sanctions could directly hurt the company. In addition, “if it is reasonably likely that public opposition to the company would have a materially adverse effect on the operations of the company, this risk would also need to be disclosed.”

The decision is a big victory for human rights groups that have been trying to influence share prices by urging investors to avoid companies doing business in countries that violate human rights or religious freedoms. In effect, the SEC has said that the campaigns are hurting the stock prices of controversial companies.

The US focus has been on Sudan, where a civil war has claimed more than 2m lives. Mr Wolf has urged that PetroChina and Talisman Energy, two of the groups involved in developing the Sudanese oil fields, be barred from trading in the US.

The campaign scored its biggest success last year when it put pressure on public pension funds and other investors to boycott a New York share offering by PetroChina. The offering eventually yielded $2.9bn, a fraction of the $10bn the company had been seeking.

Sudan activists, with the Casey Institute doing the research legwork, have also been calling for broader restrictions on the ability of these companies to raise funds in the US.

However, Ms Unger said in the letter that she had no authority to take such a drastic step. But she said “we take very seriously” the charge made by Mr Wolf that the two companies “may have failed to disclose material information” with respect to their operations in Sudan. She would not say whether the two companies are under investigation, but said the matter had been referred to the SEC’s enforcement division.

While the pressure has been focused on Sudan, Ms Unger’s decision will have much broader ramifications. Many foreign companies listing in the US, particularly energy companies, have operations in countries under US embargo and will be affected by the new requirements. The disclosure requirement affects any company or entity that is covered by sanctions administered by the Treasury’s Office of Foreign Assets Control.
Michael Mann, former director of international affairs for the SEC, said that while the decision pushes disclosure requirements into new areas, it appears broadly consistent with past practices. The SEC, he said, has often updated its assessment of what constitutes material risk for investors, beginning with new environmental criteria following the Love Canal toxic dump scandal of the late 1970s.

The decision will also put new pressure on mutual funds and pension funds to expand their assessments of the political risks of investing in certain companies.