[Federal Register Volume 72, Number 225 (Friday, November 23, 2007)]
[Proposed Rules]
[Pages 65862-65865]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-22789]



[[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

  Federal Register / Vol. 72, No. 225 / Friday, November 23, 2007 / 
Proposed Rules  

[[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 [email protected]. 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

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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