[Federal Register: November 23, 2007 (Volume 72, Number 225)]
[Proposed Rules]
[Page 65861-65865]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23no07-21]
[[Page 65861]]
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Part III
Securities and Exchange Commission
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17 CFR Parts 228, 229, 230 et al.
Concept Release on Mechanisms To Access Disclosures Relating to
Business Activities in or With Countries Designated as State Sponsors
of Terrorism; Concept Release; Proposed Rule
[[Page 65862]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 228, 229, 230, 239, 240 and 249
[Release Nos. 33-8860; 34-56803; File No. S7-27-07]
RIN 3235-AJ98
Concept Release on Mechanisms To Access Disclosures Relating to
Business Activities in or With Countries Designated as State Sponsors
of Terrorism
AGENCY: Securities and Exchange Commission.
ACTION: Concept release.
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SUMMARY: The Securities and Exchange Commission is soliciting comment
about whether to develop mechanisms to facilitate greater access to
companies' disclosures concerning their business activities in or with
countries designated as State Sponsors of Terrorism.
DATES: Comments should be received on or before January 22, 2008.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/concept.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-27-07 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-27-07. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/concept.shtml). Comments
are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: James Lopez, Division of Corporation
Finance at (202) 551-3536; U.S. Securities and Exchange Commission, 100
F Street, NE., Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION:
I. Background
The U.S. Department of State publishes a list of countries that the
Secretary of State has designated as State Sponsors of Terrorism.\1\
The five countries the U.S. Secretary of State currently designates as
State Sponsors of Terrorism are Cuba, Iran, North Korea, Sudan and
Syria. Over the last several years, a large number of state
governments, universities, pension funds, and other institutional
investors, as well as individual investors, have sought information
relating to public company business activities in or with State
Sponsors of Terrorism in furtherance of their desire to ensure that
their invested funds do not directly or indirectly support
terrorism.\2\
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\1\ State sponsors of terrorism are designated under three laws:
Export Administration Act of 1979, 50 U.S.C. App. Sec. 2405(j)
(2000), Arms Export Control Act, 22 U.S.C. 2780(d) (2000), and
Foreign Assistance Act of 1961, 22 U.S.C. 2371(a) (2000).
\2\ See, e.g., Letter from 50 trustees of state treasurers to
the State Department, Commerce Department, Treasury Department and
Securities and Exchange Commission (June 3, 2005), available at
http://www.cii.org/site_files/pdfs/letters/Joint%20Ltr%2050%20pf%20to%20US%20govt%2006-03-05.pdf
.
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The Commission's Office of Global Security Risk routinely monitors
public company disclosure of material business activities in or with
State Sponsors of Terrorism. On June 25, 2007, the Commission added a
feature to its Web site that provided direct access to public
companies' 2006 annual report disclosures concerning past, current or
anticipated business activities in or with one or more of these
countries.\3\ The sole purpose of the Web site feature was to provide
direct access to company disclosures on this topic.
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\3\ Press Release, SEC Adds Software Tool for Investors Seeking
Information on Companies' Activities in Countries Known to Sponsor
Terrorism (June 20, 2007).
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The web feature was constructed as a tool to assist investors
seeking to view companies' disclosures regarding business activities in
or with any of the five State Department-designated State Sponsors of
Terrorism. It was not based on a simple keyword search of the
Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The
web tool was the result of a staff review of company disclosure
including any reference to a State Sponsor of Terrorism. This
disclosure review allowed the web tool to exclude disclosure unrelated
to a company's activities in or with any of these countries (e.g.,
generic references to a country; references to a State Sponsor of
Terrorism in the context of an executive officer's or director's
experience and educational background; or generic descriptions of risk
associated with the possibility of war).\4\ It also permitted the web
tool to exclude companies whose disclosures stated that they did not
conduct business in or with State Sponsors of Terrorism. The
Commission's staff did not apply any other filter in screening
disclosure content. In order to provide proper context, all of the
company disclosures available through the web tool were linked directly
to the full text of the company's annual report. Our Web site analytics
indicated that visitors typically clicked through a company name to the
text of a company's own disclosure. Moreover, the SEC provided no
commentary on the company's own disclosures except to state that the
existence of a disclosure by a company concerning activities in one of
the State Sponsors of Terrorism does not, in itself, mean that the
company directly or indirectly supports terrorism or is otherwise
engaged in any improper activity.
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\4\ For example, the web posting excluded generic references to
hostilities or discord between North Korea and South Korea.
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The construction and operation of the web tool generated many
comments, both positive and negative, based on exceptionally high
traffic. A number of the negative comments raised serious concerns
about the lack of updated information beyond what a company had
included in its most recent annual report. Other concerns included the
possible negative connotation that could attach to a company when its
disclosure was presented, even though the company's disclosure
concerned benign activities such as news reporting within a State
Sponsor of Terrorism or immaterial activities that the company
voluntarily disclosed. The comments received have been extremely useful
to the Commission in evaluating the performance and appropriateness of
the web tool.
Because of the importance the SEC places on complete, accurate, and
timely disclosure, comments about the web tool's inability to access
more current information about a company's business activities in or
with a State
[[Page 65863]]
Sponsor of Terrorism since the date of the company's most recent annual
report were of particular concern to the agency. Because more recent
disclosure might include, for example, the fact that a company had
completely terminated its activities in a country, the more recent
information could be material to a complete understanding of the
disclosure in the last annual report. We also question whether a
company's disclosure of legitimate or immaterial business activity
should lead to its being identified through a web tool that highlights
connections to State Sponsors of Terrorism.
To address these and related concerns, on July 20, 2007, the web
tool was indefinitely suspended. The July 20, 2007 suspension
announcement indicated that the Commission staff would consider whether
to recommend a Concept Release on the question of how best to make
public company disclosure of business activities in or with a State
Sponsor of Terrorism more accessible.\5\ The Commission is issuing this
Concept Release as a result of that process, in order to solicit public
comment on these important issues in a more formal way. Engaging the
public's input on these issues is particularly appropriate to the
extent that we contemplate novel approaches to investor access to
company disclosures. The Commission hopes that this process will afford
the best opportunity to address all legitimate concerns.
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\5\ Press Release, Statement by Securities and Exchange
Commission Chairman Christopher Cox Concerning Companies' Activities
in Countries Known to Sponsor Terrorism (July 20, 2007).
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II. Disclosure of Business Activities in or With Countries Designated
as State Sponsors of Terrorism
The federal securities laws do not impose a specific disclosure
requirement that addresses business activities in or with a country
based upon its designation as a State Sponsor of Terrorism. However,
the federal securities laws do require disclosure of business
activities in or with a State Sponsor of Terrorism if this constitutes
material information that is necessary to make a company's statements,
in the light of the circumstances under which they are made, not
misleading.\6\ The term ``material'' is not defined in the federal
securities laws. Rather, the Supreme Court has determined information
to be material if there is a substantial likelihood that a reasonable
investor would consider the information important in making an
investment decision or if the information would significantly alter the
total mix of available information.\7\
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\6\ Rule 408 of Regulation C, [17 CFR 230.408] and Rule 12b-20
under the Securities Exchange Act of 1934 [17 CFR 240.12b-20].
\7\ TSC Industries v. Northway, Inc., 426 U.S. 438 (1976). It
has also held that materiality of contingent or speculative events
or information depends on balancing the probability that the event
will occur and the expected magnitude of the event. Basic v.
Levinson, 485 U.S. 224, 238 (1988).
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The materiality standard applicable to a company's activities in or
with State Sponsors of Terrorism is the same materiality standard
applicable to all other corporate activities. Any such material
information not covered by a specific rule or regulation must be
disclosed if necessary to make the required statements, in the light of
the circumstances under which they are made, not misleading. The
materiality standard's extensive regulatory and judicial history helps
companies and their counsel to interpret and apply it consistently, and
we remain committed to employing this standard to company disclosure
regarding business activities in or with State Sponsors of Terrorism.
Although the Commission is well positioned to review disclosure
relating to business activities regardless of the country in which they
are conducted, we do not have the expertise or information necessary to
identify the particular countries whose governments have funded,
sponsored, provided a safe haven for, or otherwise supported terrorism.
Nor is it the Commission's role to determine the degree to which a
public company's business activities may support terrorism or may be
inconsistent with U.S. foreign policy or U.S. national interests.
Information that companies provide regarding their business
activities in or with State Sponsors of Terrorism is currently
available in various public filings they make with the Commission.
Searching for and comparing such disclosure can be difficult and time
consuming using the EDGAR system, although we have recently made it
easier by adding an advanced full-text search function.\8\ The
Commission seeks public comment on whether easier access to this
information is appropriate.
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\8\ By accessing EDGAR, the page titled ``EDGAR Full-Text
Search,'' and clicking on ``Advanced Search,'' the user can search
for, among other terms, the names of the countries designated as
State Sponsors of Terrorism, and limit the results to certain
filings and documents, such as annual reports (e.g., Form 10-K or
20-F) or company correspondence (``CORRESP'') with the Commission's
staff.
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Request for Comment
1. The Commission does not provide enhanced access to disclosures
concerning other specific subject areas. Should we do so in this case?
Why or why not?
2. Would providing easier access to companies' disclosures of
business in or with State Sponsors of Terrorism place appropriate
emphasis on that issue or would it place undue emphasis? Would
providing for easier access to such disclosures be consistent with the
Commission's mission of protecting investors, maintaining fair, orderly
and efficient markets, and facilitating capital formation?
3. Regardless of the particular approach that the Commission might
pursue to provide investors with easier access to companies'
disclosures concerning their business in or with State Sponsors of
Terrorism, are there potential unintended consequences of providing
easier access to company disclosures in this area that the Commission
should consider? If so, what are they? Are there steps the Commission
could take to minimize them?
4. Would providing easier investor access to companies' disclosures
concerning their business in or with State Sponsors of Terrorism
disproportionately impact U.S. or foreign private issuers? If so, how?
5. Would providing easier investor access to U.S. listed companies'
disclosures concerning their business in or with State Sponsors of
Terrorism positively or negatively impact the competitiveness of U.S.
financial markets?
6. The Commission's staff, when reviewing disclosure related to
business activities in or with a State Sponsor of Terrorism, interprets
materiality in the same way it does when reviewing disclosure relating
to any other corporate activities not covered by a specific rule or
regulation. We nevertheless seek comment raising any opposing views and
alternatives. Commenters should discuss in detail the bases for their
views and recommendations.
7. Is the information currently available in public company filings
regarding business activities in or with State Sponsors of Terrorism
sufficient?
8. Do investors find the information that public companies
currently disclose about their business activities in or with State
Sponsors of Terrorism important in making investment decisions?
III. Means of Providing Easier Access to Existing Company Disclosures
In seeking public comment on whether providing easier access to
such disclosure is appropriate, the Commission seeks additional comment
[[Page 65864]]
on whether it should pursue one of the following alternative means to
accomplish this end.
Improvements to the Web Tool
The web tool we discuss in Section I, and previously available on
the Investor Information section of the SEC Web site, contained the
names of companies that disclosed in their 2006 annual reports business
activities in or with one or more of the five State Sponsors of
Terrorism. After accessing the web tool and clicking on one of the five
countries, an investor could click on the name of a company that
appeared under the country name to view the relevant portion of its
2006 annual report. The disclosure page included a link to the
company's entire 2006 annual report as well as all of its other
filings, including those it filed after its annual report. As discussed
above, company disclosure referencing a State Sponsor of Terrorism that
was unrelated to business activities was not available through the web
tool.\9\ However, company disclosure indicating that the company was in
the process of terminating business activities in or with one of the
countries was made available through the web tool. Similarly, company
disclosure of business activities regardless of their materiality,
nature, or legality was made available through the web tool. The
inclusion of company disclosure regardless of the amount or nature of
business activities in or with a State Sponsor of Terrorism was
designed to avoid any indication that a conclusion had been reached
about or any advice provided regarding the propriety of a company's
activities. Instead, the tool was designed to provide easier access to
information that would allow an investor to come to his or her own
conclusion regarding a company's business activities in or with State
Sponsors of Terrorism. This approach raised concerns, however.
Companies named on the SEC's Web site maintained that inclusion of a
company's disclosure via the web tool, regardless of the
appropriateness of the activity, created a negative impression and
might cause them reputational harm.
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\9\ As such, companies were excluded if the disclosure stated
that the company did not do business in or with the particular
country.
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The Commission seeks public comment on whether it should reinstate
a web tool and, if so, how to address the shortcomings that were
present in the prototype. Some have suggested that, at a minimum, the
following issues would need to be addressed: broadening the universe of
available disclosure documents; including a company's most recent
filings to ensure that the Web site information is timely; and
displaying the methodology used to select the companies for the Web
site and the frequency of updates, including a description of the
limitations on the information such as the fact that a company might
disclose more than is required under the securities laws. Of the above
list, the most difficult recommendation to implement would be the
requirement that Commission staff constantly update the universe of
current and periodic report and other filing disclosure available
through the web tool, in order to keep the information timely. Doing
this would require a significant and indefinite commitment of agency
personnel, with concomitant impacts on the SEC budget and on the other
work of the Commission, particularly within the Division of Corporation
Finance. The recommendations listed above may not address all of the
concerns that the web tool raised.
Request for Comment
9. Do the recommendations listed above adequately address the
concerns with the prototype web tool? What specific improvements could
be made to address those concerns? Are there additional concerns that
need to be addressed?
10. Should the Commission reinstitute the web tool, with
improvements? If so, what specific improvements should we make to the
web tool before we once again make it publicly available?
11. If the Commission were to reinstitute the web tool, how
frequently should it update the database of documents containing
relevant disclosure?
12. Could the implementation of a web-based tool have adverse
consequences, such as reducing the amount of information, not otherwise
subject to disclosure under the federal securities laws, which a
company chooses to make available to investors?
13. Is the concept of a web tool that begins with a Commission-
generated list of companies inherently flawed?
Data Tagging by Companies Themselves
Since 2004, the Commission has devoted increasing attention and
resources to the possibility of making periodic reports companies file
with the Commission, including financial statements, interactive.
Through the use of data tags--computer labels written in the XBRL
computer language--users of company disclosure documents could more
easily search, retrieve, and analyze information. For nearly two years,
the Commission has had a pilot program underway in which companies
voluntarily tag their financial statement information using XBRL
labels. Over 40 companies, with a market capitalization of over $2
trillion, now participate in the program. At the same time, the
Commission is currently developing web-based tools that take advantage
of the power of interactive data technology. One such tool, which we
expect to make available soon, will let investors compare executive
compensation across 500 of the nation's largest public companies.
One means of enhancing the searchability and comparability of
company disclosures concerning business activities in State Sponsors of
Terrorism would be for a company to apply data tags to identify the
nature of the disclosure. The Commission seeks public comment on
whether it should consider the use of data tagging to enhance access to
public company information about business activities in or with the
State Sponsors of Terrorism.
When the Commission released a web tool on June 25, 2007 that
provided direct access to public companies' disclosures about their
business activities in or with the State Sponsors of Terrorism, we
stated that ``[t]he existence of a disclosure by a company concerning
activities in one of the listed countries does not, in itself, mean
that the company directly or indirectly supports terrorism or is
otherwise engaged in any improper activity.'' \10\ Nonetheless, several
of the companies whose disclosures were identified in the web tool
stated that the information in their annual reports was not indicative
of their doing business in a State Sponsor of Terrorism, or
alternatively that it was not indicative of their doing a material
amount of business in such a country, or that it did not concern the
kinds of business activities with which investors normally would be
concerned. The common theme to these various comments was, in other
words, that company disclosures had been mislabeled. One way to
directly address this concern would be to authorize the companies
themselves to use data tags that would determine how their disclosures
would be called up in response to web-based searches.
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\10\ Press Release, SEC Adds Software Tool for Investors Seeking
Information on Companies' Activities in Countries Known to Sponsor
Terrorism (June 20, 2007).
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Were this approach to be adopted, a further potential benefit would
be to eliminate any Commission role in characterizing a company's
disclosure
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with a web tool. Because companies would apply the tags themselves to
their own disclosures, the information that a web search tool would
highlight for investor scrutiny would be determined not by the
Commission but by each company.
The use of company data tagging also has the potential to address
concerns about the timeliness of information the web tool displays.
Rather than relying upon a company's most recent annual report, the web
tool would rely on data tags attached to any company filing, including,
for example, current reports on Form 8-K. As a result, the web tool
would display information to any user the moment it was electronically
filed with the Commission.
Finally, the use of company data tagging would substantially reduce
the necessity to dedicate significant Commission staff resources on an
ongoing basis, since the companies, not the Commission staff, would
determine what disclosures the web tool would display.
In order for the Commission to adopt this approach, it would first
be necessary to prepare a simple taxonomy of XBRL data tags which
companies could apply to the various kinds of disclosure that they make
with respect to business activities in or with State Sponsors of
Terrorism. A recent example of how this might be done is the
specialized taxonomy that was prepared for mutual fund performance data
by the Investment Company Institute, and that is currently being
reviewed by XBRL US, the independent private sector standard setter for
interactive data tags. Once the taxonomy was completed, the data tags
would then be published on the web and made available, free of charge,
to every public company. The Commission seeks public comment on whether
it should seek to provide investors easier access to public companies'
disclosure about business activities in or with State Sponsors of
Terrorism through the use of interactive data tags in the XBRL language
that companies would apply themselves.
Request for Comment
14. Should the Commission consider proposing a requirement that
companies use XBRL data tags to identify various types of disclosure
regarding business activities in or with State Sponsors of Terrorism?
Alternatively, should the use of XBRL data tags be voluntary?
15. If the Commission were to pursue data tagging, who should
define the various categories of disclosure?
16. If the Commission were to pursue data tagging, to which
categories of disclosure should the data tags correspond? For example,
should there be a category for business activities that the company
considers immaterial to its business, but which it chooses to disclose
voluntarily? Or for business activities in State Sponsors of Terrorism
that are perceived as benign, such as news gathering or humanitarian
work? Should there be a category for business activity that has ceased?
Or for disclosure that no business activities with any State Sponsor of
Terrorism have ever existed? What other categorization would be
necessary to promote clarity and ease of use?
17. If the Commission were to pursue data tagging, what types of
information should it require companies to tag? For example, should a
company be required to tag only that disclosure which relates to
ongoing business activities in or with a State Sponsor of Terrorism?
Should it also tag data relating to disclosure of business activities
that ceased during the period of the report, or during a certain time
period prior to that?
18. If the Commission were to pursue data tagging, which reports
and filings with the SEC should include this tagged disclosure?
19. Should the Commission consider options other than data tagging
or a web tool? If so, what?
IV. General Request for Comments
In addition to the areas for comment identified above, we are
interested in any other issues that commenters may wish to address that
are related to the Commission's consideration of providing improved
investor access to disclosures concerning public companies' business
activities in or with State Sponsors of Terrorism. We are also
interested in any issues that commenters may wish to address relating
to the relative benefits and costs of providing improved access to
public company disclosures in this area. Please be as specific as
possible in your discussion and analysis of any additional issues.
Where possible, please provide empirical data or observations to
support or illustrate your comments.
By the Commission.
Dated: November 16, 2007.
Nancy M. Morris,
Secretary.
[FR Doc. E7-22789 Filed 11-21-07; 8:45 am]
BILLING CODE 8011-01-P