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SEC Reporting for Certain 2012 Iran-Related Transactions
Mandatory requirements cover actions of issuers' foreign subsidiaries and affiliates.
On August 10, 2012, section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (the Act), 112 P.L. 158, added new subsection (r) to section 13 of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78m. This new subsection imposes mandatory reporting requirements for certain 2012 Iran-related transactions—even when such a transaction was not an Office of Foreign Assets Control (OFAC) violation at the time the transaction occurred.
Section 219 of the Act requires that an "issuer" disclose certain information in either its annual or quarterly report filed with the Securities and Exchange Commission (SEC) if the issuer or any "affiliate" of the issuer (as defined for purposes of the Exchange Act and Rule 12b-2) has knowingly conducted or engaged in any activity that includes, but is not strictly limited to, the following:
- Certain activities involving the development of (a) petroleum resources in Iran, (b) Iran's nuclear capability, (c) Iran's weapons of mass destruction, or (d) other Iranian military capabilities.
- Certain activities involving Iran's energy sectors.
- Transactions or dealings with a person or entity identified by the U.S. Department of Treasury's OFAC as a Specially Designated National (SDN) or blocked party. (This requirement is not specifically limited to Iran and, as a result, may go beyond Iran because SDNs are located throughout the world and many SDNs have no connection to Iran.)
- Certain banking transactions supporting Iran's weapons of mass destruction activities/terrorism.
- Transactions or dealings with an entity or instrumentality acting on behalf of, or representing, the government of Iran.
The transactions that must be reported are transactions in which the reporter was "knowingly" engaged. The term "knowingly" is defined in section 2 of the Act by express reference to section 14 of the Iran Sanctions Act, P.L. 104-172. It means, with respect to conduct, a circumstance, or a result, that a person has actual knowledge, or should have known, of the conduct, the circumstance, or the result.
The Act further defines what information needs to be disclosed to the SEC for any of the above reasons. The information must be included in the issuer's periodic report, and the issuer also must file a notice with the SEC advising the SEC that it has included such information in the periodic report. The SEC is required to promptly transmit the report to the president and specified committees of the Senate and the House of Representatives, and the U.S. government is required to initiate an investigation.
Section 219(b) of the Act specifies that new section 13(r) of the Exchange Act "shall take effect with respect to reports required to be filed with the Securities and Exchange Commission after the date that is 180 days after the date of the enactment of this Act," which is February 6, 2013.
For issuers with periodic reports that are required to be filed on a date after February 6, 2013—such as the 2012 Form 10-K for calendar year filers—the SEC has issued guidance stating that the issuer is required to disclose Iran-related business activities pursuant to section 13(r) if it files the periodic report on or before February 6, 2013. The SEC interprets "reports required to be filed" to include any periodic report with a due date after February 6, 2013, regardless of whether the report is filed early.
Scope of Reporting
An issuer is required to disclose all Iran-related activities specified in section 219 (section 13(r)(1)) that occurred during the period covered by the report, which, for a Form 10-K, is the entire fiscal year. For example, an issuer that files an annual report for the fiscal year ending December 31, 2012, is required to disclose any activities specified in section 13(r)(1) that took place between January 1, 2012, and December 31, 2012.
All activities covered by the provisions referenced in section 219 (section 13(r)) must be reported if such activities were engaged in during the period covered by the Forms 10-Q or 10-K. Disclosure of the specified Iran-related activity is required even if such section 219 (section 13(r)) activity was not unlawful at the time it was conducted.
In other words, transactions with Iran by an issuer's foreign affiliate that were lawful in January 2012 must nevertheless be reported to the SEC in an annual Form 10-K report for the fiscal year ending 2012.
Since the definition of "affiliate" in Rule 12b-2 under the Exchange Act includes entities under common control, the new disclosure requirement will include activities covered by the provisions of section 219 (section 13(r)) that are engaged in by persons controlled by a person that controls an issuer, even if such controlled third parties are not subject to the U.S. prohibitions relating to activities involving Iran. OFAC has adopted rules that state that a non-U.S. entity is "owned or controlled" by a U.S. person if the U.S. person (i) holds 50% of more of the equity interest by vote or value in the entity, (ii) holds a majority of seats on the board of directors of the entity, or (iii) otherwise controls the actions, policies, or personnel decisions of the entity. 31 C.F.R. pt. 560.215(b). For example, a director of an issuer who is considered to be an affiliate may control third parties that the issuer is not considered to "own or control" under OFAC's rule, but the director is required to report any activities described in the provisions referenced in section 219 (section 13(r)) even though the third party is not subject to the U.S. prohibitions relating to activities involving Iran.
Failure to report Iran-related activities that are required to be reported under section 219 can result in an SEC enforcement action.