SEC Examining Business Dealings in Rogue Nations

March 5, 2004 ( - The US Securities and Exchange Commission is creating an office of global security risk to look for corporate investments in countries purported to harbor terrorists, a move being applauded by some public pension funds.

The new SEC office was created after a fiscal 2004 funding bill directed the agency to identify companies with ties to states that sponsor terrorism and improve disclosure to investors in such firms.   In particular, US Representative Frank Wolf (R – Virginia) – chairman of the House of Representatives’ Appropriations subcommittee – sought the change, worried that Americans may invest unwittingly in companies that do business in countries that sponsor terrorists or violate human rights, according to a Dow Jones report.

In particular, the SEC office will be looking for companies with business dealings in countries that the US State Department has labeled as “rogue nations” (See   Asset Mix: Terrorist Tactics).   That list includes such global hotspots as:

  • Cuba
  • Iran
  • Iraq
  • Libya
  • North Korea
  • Sudan
  • Syria.

To handle the scrutiny of 12,000 US companies’ financial reports, the SEC plans to hire five full-time employees.   The quintet will work in conjunction with the SEC’s corporate-finance division to identify companies operating in risky areas and ensure they provide investors with sufficient information about such risks.   So far, the SEC has posted the job openings, but has not hired anyone yet.

Pension Praise

For some public pension funds the move is a welcomed oversight (See  State Plans Revving Up Engines for Anti-Terror Campaign ).   T he Iowa Public Employees’ Retirement System (IPERS) applauded the move in a news release, saying the increased disclosure will hopefully help guide the public pension fund’s investments by helping “us to know which companies are indirectly supporting terrorist activities.”

Iowa is not alone, and somestate plan officials are already taking steps. For example, in 2003, New York City Comptroller William Thompson accused General Electric Co, Halliburton Co and ConocoPhillips of putting shareholder value at risk by doing business in countries accused of being linked to terrorism (See NYC Pension Chief Demands Corp. Terror Review ). Pressured by the city’s $31 billion pension funds, all three companies have considered possible reviews of those ties, according to Thompson’s office.

Meanwhile, Arizona Treasurer David Petersen is using a conflict securities database to screen about $9 billion in investments, according to Tony Malaj, Petersen’s chief of staff. Lawmakers in that state failed to pass a bill that would have required all state investments to be screened for terrorism ties.

Investor Concern

On the other hand, the Council of Institutional Investors (CII) voices concern over the scrutiny since US laws are complex and US-based firms legally may do business in North Korea and Syria, and their non-U.S. subsidiaries may operate in Iran, Iraq, Libya and Sudan, but not Cuba.   Also the CII warns that s imply doing business in a rogue country should not damage a company’s reputation either.   As an example, the council draws a distinction between those companies that sell food or medicine in such places from those that sell arms.

While more information aboutUS corporate operations in rogue nations would be helpful, the pension group said investors “would almost certainly be unwise to conclude” that a company doing business in a rogue nation is supporting terrorism.