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Exchange Act Reports Must Now Disclose Certain Transactions and Activities Related to Iran

02.25.13

Section 13(r) of the Securities Exchange Act of 1934 requires any issuer obligated to file periodic reports with the Securities and Exchange Commission after February 6, 2013 to disclose certain business transactions and other activities related to Iran. New Section 13(r) is the result of th e Iran Threat Reduction and Syria Human Rights Act of 2012 (the “ITR Act”) (.PDF), legislation that increased economic and other sanctions against Iran to persuade Iran to cease its pursuit of nuclear weapons and support for terrorism.  Section 13(r) did not require any rulemaking by the SEC, but in a set of Compliance and Disclosure Interpretations issued on December 4, 2012, the SEC addressed certain questions regarding the obligations imposed on reporting issuers.

A reporting issuer must include in each of its periodic reports (such as a Form 10-K or Form 10-Q) disclosure regarding certain transactions and other activities related to Iran of the issuer or any of its affiliates (such as a subsidiary or a director or an executive officer) at any time during the period covered by the report.  The disclosure applies only to a transaction or activity that is or was “knowingly” engaged in; and “knowingly” is defined in the ITR Act as a person’s actual knowledge or that he “should have known … of the conduct, the circumstance, or the result.”  But the disclosure is required even if a transaction or activity is or was not material, even if it was engaged in before the ITR Act became law, and even if the transaction or activity is concluded or discontinued by the date of the filing of the periodic report.

The transactions or activities subject to disclosure are extensive and specified in part by reference to previous legislation regarding Iran and previous Executive Orders regarding terrorism.  In summary, they include:

  • Transactions or significant investments for the development of the petroleum or petrochemical industry in Iran, including investments in petroleum resources in or for, or transporting crude oil or refined petroleum products to, Iran.
  • Activities relating to the transfer of goods, technology, or services to Iran that are likely to be used in connection with serious human rights abuses against the Iranian people, including surveillance technology or telecommunications equipment or other technology to be used to restrict the free flow of unbiased information in Iran or to disrupt, monitor, or otherwise restrict the speech of the Iranian people.
  • Transactions or activities with an Iranian financial institution that would facilitate the efforts of the Government of Iran to acquire or develop weapons of mass destruction or provide support for international terrorism.
  • Except as specifically authorized by a United States federal governmental authority: transactions with the Government of Iran and all of its political subdivisions, agencies, and instrumentalities; with entities (whether Iranian or non-Iranian) owned or controlled by any of the foregoing; or with persons acting for or on behalf of any of the foregoing.
  • Transfers of items to Iran that would be used to assist Iran’s acquisition or development of weapons of mass destruction or other weapons for terrorist activities.

 If a reporting issuer must disclose any such activity in a periodic report, the disclosure must include:

  • The nature and extent of the activity.
  • The gross revenues and net profits (if any) attributable to such activity.
  • Whether the issuer or its affiliate intends to continue the activity.

In addition, such an issuer must separately file with the SEC a notice that disclosure has been included in the issuer’s periodic report.  When it receives such a notice, the SEC must transmit the report to the President and certain Congressional committees and post the information provided in the disclosure and the notice on the SEC’s website.  The President will then be required to initiate an investigation to determine whether or not sanctions should be imposed on the issuer or its affiliate.

If a reporting issuer has not, and none of its affiliates has, knowingly engaged in any transaction or activity subject to disclosure, the issuer is not obligated to state that in its periodic report. Non-disclosure will have the same effect.

OUR TAKE:  A reporting issuer should now routinely specifically review whether any of its transactions or activities are or have been related to Iran or are or have been with the Government of Iran or any entity or person associated with Iran.  Just as important, it should routinely make similar inquiries of its affiliates regarding their transactions or activities.  Those inquiries should be made of the issuer’s controlling shareholders as well as of the issuer’s directors and executive officers.  If the issuer’s fiscal year recently ended, it might make the inquiries of directors and executive officers through the D&O questionnaires that the issuer is now, or will soon be, processing in connection with its Form 10-K and proxy statement.  If the issuer concludes that its or its affiliates’ business or activities have or have had some relationship with Iran, the issuer will have to determine whether there is or has been any “knowing” activity of the kind subject to disclosure under Section 13(r).

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