The SEC's Flawed Terror List




By Adam Sterling and Todd M. Malan

The Securities and Exchange Commission recently rolled out a new section of its Web site that effectively "names and shames" companies doing business in countries that are on the State Department's terror watch list. In announcing the tool, SEC Chairman Christopher Cox stated that "no investor should ever have to wonder whether his or her investments or retirement savings are indirectly subsidizing a terrorist haven or genocidal state."

Given our roles as an anti-genocide activist and a lobbyist for international business, some would assume we would have wildly different takes on the SEC action. Yet we share a common concern: The SEC got it wrong.

Under U.S. law, corporations listing on American capital markets must disclose ties to state sponsors of terror. Many (but not all) companies have been doing so for years, but without the wherewithal to comb through thousands of filings, investors are unlikely to be fully informed. In that light, the SEC's Web tool appears a welcome response to those investors and policy makers who are hungry for such data.

Unfortunately, the SEC simply compiles a list of companies with the words "Sudan," "Iran," "North Korea," "Syria" or "Cuba" in their annual reports without regard to context.

The SEC's tool could easily mislead investors. For example, Baker Hughes, a company on the SEC's Sudan page, states in its 2006 annual report that its subsidiaries will "prohibit any business activity that directly or indirectly involves or facilitates transactions in Iran, Sudan or with their governments, including government-controlled companies operating outside of these countries." In other words, Baker Hughes withdrew from Sudan nearly two years ago.

Another company on the SEC's Sudan page, Immtech Pharmaceuticals, appears because it conducted clinical studies for the treatment of first-stage African sleeping sickness in Sudan. We hope this isn't the sort of corporate behavior the SEC would define as "subsidizing a terrorist haven or genocidal state."

Not only has the SEC named and shamed the wrong companies, it's missed many with significant operations in countries like Sudan. Not one of the companies generally identified as enabling the Sudanese government's genocidal capacity appears on the SEC list even though some (such as PetroChina) list on U.S. capital markets.

Some people may point to the SEC's fine-print assertion that "the 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." But when the SEC's headlines utilize the rhetoric of genocide and terrorism, the resulting effort fails to meet the standards for transparency that the agency imposes on public companies in the United States.

If the SEC truly wanted to produce a comprehensive list of companies "indirectly subsidizing" the governments of Sudan and other rogue regimes, it would need to establish some standard of materiality regarding "doing business" in a country. It is precisely this sort of information that investors need to evaluate investments in companies operating in genocidal and terror-sponsoring countries. For instance, a $500 million investment in an oil consortium operating in regions experiencing genocide is vastly different than selling less than a million dollars worth of anti-bacterial drugs to aid agencies working in refugee camps.

As the chief regulator of the world's largest capital markets, the SEC has an obligation to provide investors with timely, accurate information. It is easy to imagine a situation in which an investor might sell stock in a company on the SEC list after that company had decided to pull out of a country like Sudan but had not yet disclosed that decision in SEC filings.

While our organizations may not always see eye to eye on issues like divestment for humanitarian purposes, we do agree that transparency, openness and accuracy are a fair expectation for investors in public companies. Investors deserve better than the SEC's recent effort.

Mr. Sterling is the director of the Sudan Divestment Task Force (www.SudanDivestment.org1), a project of the Genocide Intervention Network. Mr. Malan is president and CEO of the Organization for International Investment (www.ofii.org2), which represents a number of international companies listed on U.S. exchanges.