An Expanded Role in Governance for the SEC: Iran Threat Reduction and Syria Human Rights Act

In the realm of corporate governance, the SEC has traditionally been responsible for disclosure while substance fell to the states.  The basic separation forced the Commission to use disclosure in order to change substantive behavior, an approach that worked with varying levels of success (or lack of success).  See Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure

The neat division, however, no longer exists.  Congress has increasingly given the SEC a much more substantive role in the corporate governance process.  The authority ranges from drafting listing standards for audit committees (see Rule 10a-3) and compensation committees (see Rule 10C-1) to seeking clawbacks of executive compensation.  It is the SEC, not the states, that oversees the advisory vote by shareholders on compensation (say on pay). 

Congress, however, has gone further and injected the Commission into the area of corporate social responsibility.  In Dodd-Frank, the SEC was assigned the task of implementing disclosure requirements for conflict minerals.  Some have described the information as important to investors but for the most part the disclosure requirements were designed to affect corporate behavior.  The approach likely would reduce the willingness of companies to purchase conflict minerals and reduce funding for military groups in and around the Democratic Republic of the Congo.  Disclosure imposed on resource extraction companies also has goals consonant with corporate social responsibility. 

The recent adoption of the Iran Threat Reduction and Syria Human Rights Act has pushed the SEC in yet another direction. The legislation was designed to, among other things, impose sanctions on Iran in order to stop the development of nuclear weapons.  Section 219 of the Act added a new subsection (r) to Section 13 to the Exchange Act and imposed disclosure requirements on public companies with respect to compliance with the Act.   Like the conflicts mineral requirements, the disclosure is less about investor information and more about ensuring substantive compliance. 

The provision went further, however, and required the Commission to post information about non-compliance on its web site.  Companies subject to the Act must provide the Commission with a separate notice whenever they report activity under the Act.  The Commission is then required to transmit the relevant report to the President and Congress.  In addition, however, the Commission must "make the information provided in the disclosure and the notice available to the public by posting the information on the Internet website of the Commission."

Presumably this means something other than disclosure through Edgar.  The SEC will likely have to set up a separate page that discloses reports filed pursuant to the Act.  The idea of disclosure on the SEC website has been tried before.  A number of problems arose.  Because circumstances changed, there were concerns over the timeliness of the information.  Moreover, it raised a fundamental question about the role of the SEC in publicizing these types of activities, particularly given the public nature of the disclosure.  Some of these issues may resurface in the implementation of this provision. 

The prior example was voluntary and, when confronted with all of the difficulties, abandoned.  This one, however, is mandated by Congress.  It puts the SEC into the job of disclosing on its web site certain types of corporate behavior.  Its not clear why the SEC needs to have this role but one suspects the instances of this type of requirement will increase. 

J Robert Brown Jr.