Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The Iran Threat Reduction and Syria Human Rights Act (ITRA), signed into law on August 10, 2012, added new Section 13(r) to the Exchange Act, requiring issuers that file reports under Section 13(a) of the Exchange Act to disclose in their annual or quarterly reports whether they (or any of their affiliates) have engaged in activities that could lead to sanctions under other existing laws (e.g., the Iran Sanctions Act of 1996) or in transactions with the government of Iran.  The ITRA also requires the SEC to deliver an annual report on the Section 13(r) disclosures to the President.

Issuers required to make the Section 13(r) disclosure must describe the nature and extent of the activity, the gross revenue and net profits attributable to the activity, and whether the issuer or applicable affiliate intends to continue the activity.

This week, the SEC released compliance and disclosure interpretations aimed at clarifying some common questions regarding the scope and applicability of Section 13(r).  The CD&Is (full text here) provide the following clarifications:

  • The new disclosures apply to reports “required to be filed” after February 6, 2013; the SEC interprets this to mean that Section 13(r) applies to all reports for which the filing deadline is after February 6, 2013 – in other words, an issuer can’t avoid compliance with Section 13(r) by filing its 2012 10-K early.
  • Section 13(r) requires disclosure of the specified activities for the entire period covered by the report – even if part of that period predates the ITRA.  For a calendar year filer, this means the 2012 10-K must address activities engaged in between January 1 and December 31, 2012, even though the ITRA only became law in August.
  • The term “affiliate” as used in Section 13(r) has the definition given in Rule 12b-2 under the Exchange Act: “a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.”
  • Negative disclosure is not required for compliance with Section 13(r); if an issuer and its affiliates have not engaged in any of the specified activities, they need not include a statement to that effect.
  • Although there is an exception from the disclosure requirement for certain transactions that have been specifically authorized by a federal department or agency of the U.S. government, this exception does not apply to transactions that have been specifically approved only by a foreign government.
  • Transactions conducted pursuant to a specific Office of Foreign Asset Control (OFAC) license, as well as pursuant to a general OFAC license (which applies not to a specific transaction but to a type or class of transactions) are exempt from disclosure pursuant to Section 13(r), because both specific and general OFAC licenses come within the meaning of approval by a federal department or agency (OFAC is a part of the U.S. Department of the Treasury).
  • The information contained in the Section 13(r) disclosures will be publicly available upon filing, just as the rest of the information in the periodic reports is publicly available.

Check frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.