SEC Orders Foreign Firms to Report Activities

0 Comments | Insight on the News, June 18, 2001 | by Jamie Dettmer

As noted here several weeks ago, an intriguing fight is looming about what hawks believe would be the most effective punishment the United States could impose upon China and other "bad actors" on the international scene who defy Western norms: Hinder their access to the U.S. capital markets. That battle now likely will be more politically brutal because of the recent "hawkish" decision of the Securities and Exchange Commission (SEC) to require foreign firms raising U.S. capital to disclose their activities and those of subsidiaries in countries such as the Sudan and Cuba that are subject to U.S. sanctions.

Along with the greater disclosure demand, foreign firms will be required to file information electronically, making it more readily available for investors.

The hawks in this particular battle include organized labor, environmentalists and mainstream Christian bodies, too. They greeted the decision by acting SEC head Laura Unger to expand the commission's scrutiny of foreign firms with jubilation. Led by the William J. Casey Institute's Roger Robinson, a one-time Reagan National Security Council economic-warfare aide, they long have campaigned for tough disclosure and transparency rules for overseas companies seeking to sell securities in the U.S. capital markets.

Their argument is that Americans unwittingly are funding companies that are blithely assisting unpleasant regimes to wage civil wars, sponsor terrorism, abuse religious minorities -- black Christians in the case of the Sudan -- and set about developing weapons of mass destruction. If American investors knew what purposes their money was being used for, they would be outraged, maintain members of the motley transparency-and-disclosure movement. And investing in companies conducting business with "rogue" nations is inherently risky for investors, too, they insist.

The Casey Institute has agitated for five years to have matters of national security, human rights and religious freedom treated as investment risks. The institute's major focus has been on the Sudan and the oil activities of Beijing's PetroChina and Canada's Talisman Energy.

Raising a hue and cry, the alliance led by the institute has managed to reduce by more than one-third the amount of funds Chinese interests sought to raise last year on the U.S. capital markets. Fearing bad publicity, mutual-fund and pension managers and state governments were loath to take up bond offerings or initial public offerings from Chinese firms. Instead of securing the $18 billion of investment the Chinese planned to raise on Wall Street, they had to settle for $13 billion. Talisman, too, found that the agitation depressed its share price.

The SEC's ruling to expand disclosure rules -- it was conveyed in a May 18 letter to Rep. Frank Wolf, R-Va. -- hasn't delighted the big Wall Street financial houses such as Goldman Sachs and Morgan Stanley. They stand to lose huge commission fees. And the White House, the Treasury Department and Federal Reserve Chairman Alan Greenspan also are dismayed by it. They are gearing up to persuade the SEC, which is being inundated by complaints from Wall Street bankers, to water down the new finding.

Administration sources say Greenspan wasted little time in contacting Treasury Secretary Paul O'Neill about the SEC's decision. He long has opposed capital-market sanctions as anathema to the capitalist system and potentially damaging to U.S. capital markets.

But transparency-and-disclosure advocates such as Robinson pooh-pooh this, insisting that because of its dominance in the capital-raising markets the United States will lose no business. "Last year the Chinese found they couldn't go anywhere to make up what they wanted to raise -- other markets just don't have the same amount of available money, and they were reluctant to touch firms U.S. investors were dubious about," says Robinson.

The SEC's decision also is worrying some U.S. diplomats, who are bracing for a flood of complaints from foreign governments, including European allies. "They're likely to argue that we are trying to force their companies to follow our foreign policy," says a State Department source.

But trying to get the SEC to shift its well-researched legal position is likely to prove difficult. Section chiefs, including David Martin, the head of the Division of Corporation Finance, firmly are behind expanding SEC scrutiny. In a May 8 memo to Unger leaked to political notebook, Martin states that a 1976 Supreme Court ruling would appear to support expanded disclosure rules. "The Supreme Court has held that information is material if `there is substantial likelihood that a reasonable shareholder would consider it important in making an investment decision,'" he noted.

Martin adds: "We agree that a reasonable investor would likely consider it significant that a foreign company raising capital in the U.S. markets has business relationships with countries, governments and entities with which any U.S. company would be prohibited from dealing because of U.S. economic sanctions."