We have all watched with anguish and trepidation the profound horror inflicted on Ukraine—transfixed by the brilliant and courageous fight of the Ukrainian people. That fight is also being pursued in much smaller ways, even through action at the SEC. The Ukrainian-American Bar Association, a former Ukrainian finance minister and a U.S. charity focused on Ukraine have just filed a rulemaking petition with the SEC, requesting that the SEC enact a rule requiring issuers to disclose their business dealings in and with the Russian Federation and the Republic of Belarus. Whether or not the SEC considers or accedes to the request remains to be seen, but let’s hope that Ukraine’s victory is so swift that this rulemaking becomes entirely unnecessary.
The petition requests the SEC to mandate disclosure regarding issuers’ sales to and purchases from Russia (direct and indirect), their ownership of assets in Russia and their stakes in entities registered in Russia. The petitioners also advocate that issuers conduct reasonable supply chain due diligence about their customers and suppliers to ensure that their disclosures include indirect transactions in and with Russia.
The petition begins by summarizing the history of the invasion, the response of the U.S. with economic sanctions and blocking measures, and the varied responses of companies. The petitioners contend that the
“varying stances of issuers regarding their business in Russia and the choice of many to continue operating in and doing business with Russia makes information about such activities of vital importance to investors. This information is vital because it provides disclosure to investors regarding the risks and costs of continuing to operate in a heavily sanctioned market ruled by a government moving to nationalize industry. Disclosure will also enable investors and regulators to ensure issuers are meeting the ever more complex sanctions rules regarding operations in the Russian market. Likewise, issuers are concerned that Russia may apply its own counter-sanctions against issuers that do not continue fully their operations within Russia. This proposed disclosure would help investors better understand the cost of doing business in Russia.”
The petitioners believe information about activity with Russia is material to investors regardless of the level of activity. Even if the monetary amount involved is quantitatively immaterial, petitioners contend, in this context, the information would be material qualitatively, allowing investors to understand issuers’ financial exposure—including the possibility of controls on capital and nationalization or expropriation of assets by Russia—and reputational risk—including the possibility of boycotts by customers, employees and investors. Many investors may also want to be sure “that their investments are in no way associated with or contributing to the financing of war by issuers and are not in violation of imposed sanctions.” As reflected in the proliferation of investor concerns about ESG, the petition continues, “investors are increasingly expecting businesses to play an active role in broader society and be responsible corporate citizens for the betterment of the world.”
In addition, petitioners argue, investors may want to understand the plight of employees of issuers’ Russian operations in light of reports that they have faced threats from the government. According to the petition, the information could also provide insights into the quality of the issuers’ managements and boards and supply information that would enable investors to engage with issuers or submit shareholder proposals.
While insisting that the petition “is about material disclosures, not moral and values-based decisions or enforcement,” petitioners acknowledge that the requested rulemaking could involve a bit of regulation by humiliation: these disclosure requirements could have the effect of compelling some issuers to “discontinue business in and with Russia, which is associated with multiple business and reputational risks and increased costs due to sanctions, currency, and logistical constraints.” But that is not unprecedented, they maintain. In that regard, petitioners point to two precedents for the substance of their rulemaking petition: the Iran Threat Reduction and Syria Human Rights Act of 2012, which amended the Exchange Act to require public companies to disclose whether they have engaged in certain activities or transactions related to Iran, and the conflict minerals rules mandated under Dodd-Frank “in response to the trade of conflict minerals by armed rebels engaging in conflict in the Democratic Republic of Congo and adjoining countries.” The petitioners note that they also plan to petition Congress to enact rules comparable to those requested in their petition to the SEC.