Tuesday, April 26, 2022

Ukrainian Bar Association asks SEC to require disclosure of Russia/Belarus business dealings

By John Filar Atwood

The Ukrainian Bar Association has asked the SEC to adopt a rule to require public companies to disclose their business dealings in and with Russia and Belarus and any other jurisdiction supporting Russia in its war with Ukraine. The association believes the disclosure requirements may compel some issuers to discontinue business in and with Russia due to business and reputational risks, as well as increased costs due to sanctions, currency, and logistical constraints.

In a rulemaking petition, the group asked that the required disclosure include, but not be limited to, direct and indirect sales to Russia, direct and indirect purchases from Russia, ownership of assets in Russia, and stakes in entities registered in Russia. Issuers should be required to conduct due diligence about their customers and suppliers to ensure that their disclosures include amounts of indirect sales and purchases to and from Russia that can be reasonably ascertained through examination of respective supply chains, the association believes.

The association acknowledged that the U.S. has led a global swell of economic sanctions against Russia and Belarus in response to Russia’s aggression, including blocking measures against large banks and targeting individuals and entities with close ties to Vladimir Putin and the Russian military. The group noted, however, that despite the sanctions many public companies have chosen to continue to business in and with Russia.

Rationale for disclosure. The association believes the requested disclosure would inform investors about the risks and costs of continuing to operate in a heavily sanctioned market ruled by a government moving to nationalize industry. Disclosure will enable investors and regulators to ensure that issuers are meeting the complex sanctions that apply to operations in the Russian market, the group argued. Moreover, with Russia threatening counter-sanctions against issuers that do not continue fully their operations within Russia, the disclosure would help investors understand the full cost of doing business in Russia, according to the association.

Even if the business in or with Russia is considered immaterial by companies based on monetary or other measurements, the group believes that business dealings with or in Russia represents material information. Specifically, the association expects that the requested disclosure will enable shareholders and investors to:
  • Understand the exposure of issuers to costs and reputational risks associated with operating in or trading with a country ruled by an unpredictable authoritarian regime subject to numerous and growing international sanctions;
  • Ensure that their investments are in no way associated with or contributing to the financing of the war, and are not in violation of imposed sanctions;
  • Understand exposure of issuers to boycotts by customers, employees and investors stemming from their persistent engagement in business within or with Russia;
  • Understand exposure of issuers to risks that employees of its Russian operations face given the increasingly authoritarian nature of the regime;
  • Assess quality of issuer management and boards of directors, including their ability to make rational long-term decisions, and their ability to follow announced business strategy, values and codes of conduct; and
  • Obtain information that would enable shareholders to exercise their rights to submit shareholder proposals and/or engage with companies about their ongoing business in and with Russia.
Material not moral decision. The association said that its petition is about material disclosures, not about moral and values-based decisions or enforcement. The proposal does not seek to require companies to become moral arbiters, the group added.

Having said that, the association did point out the rise in businesses taking a position on ESG issues, with investors increasingly expecting businesses to be responsible corporate citizens. The group conceded that these issues are outside of the Commission’s purview at the moment, which is why its rulemaking petition is focused on the need for the disclosure of material information for the assessment of financial, business, and reputational risks stemming from investing in securities of companies engaged in business in or with Russia.

Not unprecedented. In support of its petition, the association noted that in an effort to increase sanctions against Iran for the country’s pursuit of a nuclear program and human rights abuses, Congress passed the Iran Threat Reduction and Syria Human Rights Act of 2012. The law’s requirement that public companies disclose whether they had knowingly engaged in certain activities or transactions related to Iran is similar to what the association is now requesting, the group stated.

The association also cited the Dodd-Frank Act’s required conflict minerals disclosure as further precedent. Congress enacted that section of the Dodd-Frank Act, the group argued, in response to the trade of conflict minerals by armed rebels engaging in conflict in the Democratic Republic of Congo and adjoining countries. Like its proposed rulemaking, the association believes that both the conflict minerals and Iran disclosures allow investors to decide not to support governments and organizations engaging in sanctionable behaviors by choosing not to invest or purchase products or services from those companies.

Given this legislative history relating to global conflicts, the association indicated that it intends to petition the U.S. Congress to pass legislation that requires companies to disclose any dealings in and with Russia with an objective of discouraging such activity by raising its cost and publicity.