The Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) and Section 13(r) of the Securities Exchange Act of 1934

February 22, 2013

Introduction

The Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) was signed into law by President Obama on August 10, 2012, with the purpose of: (i) strengthening the Iran Sanctions Act of 1996 (“ISA”) by further restricting access to the Iranian energy sector; (ii) furthering financial sanctions against Iran, such as those imposed under the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010 (“CISADA”), by restricting Iran’s access to the international financial system and expanding sanctions on financial institutions (including foreign financial institutions) that engage in activities relating to Iran; and (iii) expanding U.S. sanctions against Iran and Syria in response to human rights abuses in those countries. The ITRA (i) adds a number of prohibited transactions involving Iran and Syria that warrant sanctions, (ii) introduces a number of new sanctions that the United States government may impose, including sanctions applicable to certain corporate issuers, their officers and shipping companies, and (iii) increases the number of sanctions that are to be imposed by the United States government against violators from three (3) to five (5).

Of particular importance to companies that file reports with the U.S. Securities & Exchange Commission (the “SEC”) is Section 219 of the ITRA which adds a new Section 13(r) to the Securities Exchange Act of 1934 (the “Exchange Act”), titled “Disclosure of Certain Activities Relating to Iran” which requires companies filing quarterly and annual reports with the SEC pursuant to Section 13(a) of the Exchange Act to disclose Iran-related activities in those reports. The disclosures pursuant to Section 13(r) of the Exchange Act are required to be included in filings made with the SEC after February 6, 2013 (180 days from the enactment of the ITRA), which would apply to annual reports of calendar year filers on Forms 10-K and 20-F. On December 4, 2012, the SEC released new Compliance and Disclosure Interpretations (the “SEC Guidance”) clarifying the disclosure requirements of the ITRA. It is important to note that disclosure of certain activities with Iran, which is now mandatory, may lead to the imposition of sanctions on a public reporting company.

New Reporting Obligations Pursuant to Section 13(r) of the Exchange Act

The disclosure requirement applies to all companies that are required to file annual and periodic reports (i.e., public reporting companies), whether foreign or domestic, including foreign companies that are subject to these requirements by virtue of issuing securities in the United States (“foreign private issuers”). The disclosure requirements also extend to actions of subsidiaries and other affiliates of an issuer (i.e., persons or entities that directly, or indirectly through one or more intermediaries, control, are controlled by, or are under common control with the issuer). For purposes of this discussion, we refer to all persons and entities that are subject to a disclosure requirement under Section 13(r) of the Exchange Act as a “covered person”.

In order to merit disclosure of its activities with Iran, a covered person must “knowingly” engage in one of the activities expressly listed in Section 13(r) during the period covered by the annual or quarterly report. The term “knowingly” for this purpose is defined, with respect to conduct, circumstance, or a result, as a person that has ‘actual knowledge’ or should have known, of the conduct, the circumstance or the result.

The restricted activities are when a covered person has knowingly engaged in:

  • an activity described in subsection (a) or (b) of section 5 of the ISA (related to activity in Iran’s energy sector with regard to petroleum resources or proliferation of weapons of mass destruction, or WMDs);
  • an activity described in subsection (c)(2) or (d)(1) of section 104 of CISADA (related to activity by financial institutions facilitating, terrorism, the proliferation of WMDs, money laundering and other violations);
  • an activity described in Section 105A(b)(2) of CISADA (the ITRA amends CISADA to add section 105A) (related to the transfer of weapons or other technologies to Iran likely to be used for human rights abuses);

Or, a covered person has knowingly conducted a transaction dealing with:

  • Any person the property and interests in property of which are blocked pursuant to Executive Order No. 13224, relating to blocking of property and prohibiting transactions with persons who commit, threaten to commit or support terrorism;
  • Any person the property and interests in property of which are blocked pursuant to Executive Order No. 13882, relating to blocking of property of weapons or mass destruction proliferators and their supporters; or
  • Any person or entity defined under section 560.304 of title 31, Code of Federal Regulation (relating to the definition of the Government of Iran, any subdivision thereof or any entity controlled directly or indirectly by the foregoing, including any parties listed by U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC on its list of so-called “Specially Designated Nationals” (the “SDN List”), without the specific authorization of a Federal department or agency.

It is important to note that with respect to conducting business with individuals, the individuals may be Iranian citizens as well as other individuals listed in the above mentioned executive orders or who appear on the SDN List, maintained by OFAC.

Restricted Activity in Iran’s Energy Sector with Regard to Petroleum Resources or Proliferation of Weapons of Mass Destruction

The following activities related to Iran’s energy sector would require disclosure in company filings with the SEC. In addition to disclosure requirements, five or more sanctions available to the United States government may be imposed upon companies which are found to knowingly engage in any of the following activities.

The Development of Petroleum Resources of Iran

The development of petroleum resources of Iran through investments by a person of (i) $20 million or more, or (ii) a combination of investments in a 12-month period equal to at least $5 million each and $20 million or more in the aggregate, which directly or significantly contributes to the enhancement of Iran’s ability to develop petroleum resources.

The Production of Petroleum Resources of Iran

The production of refined petroleum products in Iran through the sale, lease or provision of goods, services, technology, information or support by a person, any of which has a fair market value of (i) $1 million or more, or (ii) which, during a 12-month period, have an aggregate value of $5 million or more which provides any direct or significant assistance with respect to the construction, modernization or repair of petroleum refineries or directly associated infrastructure, including construction of port facilities, railways and roads, the primary purpose of which is to support the delivery of refined petroleum products.

The Exportation of the Petroleum Resources of Iran

The exportation of refined petroleum products to Iran through the sale or provision to Iran by a person of refined petroleum products that have a fair market value of (i) $1 million or more, or (ii) which, during a 12-month period, have an aggregate fair market value of $5 million or more; OR the sale, lease or provision to Iran of “goods, services, technology, information or support” (a) any of which has a fair market value of $1,000,000 or more, or (b) that, during a 12-month period, have an aggregate fair market value of $5,000,000 or more.

As defined in the ITRA, the provision of goods, services, technology, information or support that could directly and significantly contribute to the enhancement of Iran’s ability to import refined petroleum products, includes:

  • underwriting or entering into a contract to provide insurance or reinsurance for the sale, lease or provision of such goods, services, technology, information or support;
  • financing or brokering such sale, lease or provision;
  • providing ships or shipping services to deliver refined petroleum products to Iran;
  • bartering or contracting by which goods are exchanged for insurance or reinsurance of such exchanges; or
  • purchasing, subscribing to, or facilitating the issuance of sovereign debt of the Government of Iran, including governmental bonds, issued on or after August 10, 2012.

It is important to note that there is an exception for underwriters and insurance providers exercising due diligence with regard to the exportation of petroleum resources to Iran. As such, a person providing underwriting services, insurance or reinsurance should not be subject to the imposition of sanctions if it is determined that the person has exercised due diligence in establishing and enforcing official policies, procedures and controls to ensure that the person does not enter into a contract to provide such underwriting services, insurance or reinsurance for the sale, lease, or provision of goods, services, technology, information or support.

Joint Ventures with Iran Relating to the Developing of Petroleum Resources

Participating, on or after August 10, 2012, in a joint venture with respect to the development of petroleum resources outside of Iran if: (i) the joint venture was established on or after January 1, 2002, and (a) the Government of Iran is a substantial partner or investor in the joint venture, or (b) Iran could, though an operation role in the joint venture or otherwise, receive technological knowledge or equipment not otherwise available to it that could significantly contribute to the enhancement of Iran’s ability to develop petroleum resources in Iran.

Support of Petroleum Resources and Refined Petroleum Products in Iran

Participating, on or after August 10, 2012, in the sale, lease or provision to Iran of goods, services, technology or support in connection with the enhancement of Iran’s petroleum resources, (i) any of which has a fair market value of $1 million or more, or (ii) that, during a 12-month period, have an aggregate fair market value of $5 million or more.

Development and Purchase of Petrochemical Products from Iran

Participating, on or after August 10, 2012, in the sale, lease or provision to Iran of goods, services, technology or support in connection with Iran’s domestic production of petrochemical products, (i) any of which has a fair market value of $250,000 or more; or (ii) that, during a 12-month period, have an aggregate fair market value of $1 million or more.

Transportation of Crude Oil from Iran

The transportation of crude oil from Iran must be disclosed by a company in its reports filed with the SEC if it transported crude oil from Iran after November 8, 2012 (90 days after the enactment of the ITRA). Sanctions may be imposed on a person who is a controlling beneficial owner of, or otherwise owns, operates, controls or insures a vessel that, on or after the date that is 90 days after the date of the enactment of the ITRA, was used to transport crude oil from Iran to another country, and (i) in the case of a person that is a controlling beneficial owner of the vessel, the person has actual knowledge the vessel was used to do so, or (ii) in the case of a person that otherwise owns, operates, controls or insures the vessel, the person knew or should have known the vessel was so used.

It is important to note that there is an exception for underwriters and insurance providers exercising due diligence with regard to the transportation of crude oil from Iran. As such, sanctions may not be imposed with respect to a person providing underwriting services, insurance or reinsurance if it is determined that the person has exercised due diligence in establishing and enforcing official policies, procedures and controls to ensure that the person does not provide underwriting services, insurance or reinsurance for the transportation of crude oil or refined petroleum products from Iran in a manner for which sanctions may be imposed.

Concealing Iranian Origin of Crude Oil and Refined Petroleum Product

The concealment of crude oil or petroleum products transported via vessel from Iran must be disclosed by a company in its reports with the SEC if such activity took place after November 8, 2012 (90 days after the enactment of the ITRA). The restriction applies to a person who is a controlling or beneficial owner of a vessel that, is used, with actual knowledge in the case of a person that is a beneficial owner or knowingly in the case of a person that otherwise owns, operates or controls the vessel, in a manner that conceals the Iranian origin of crude oil or refined petroleum products transported by the vessel.

Concealment of the origin of Iranian crude oil includes: (i) permitting the operator of the vessel to suspend the operation of the vessel’s satellite tracking device; or (ii) obscuring or concealing the ownership, operation or control of the vessel by (a) the Government of Iran, (b) the National Iranian Tanker Company (the “NITC”) or the Islamist Republic of Iran Shipping Lines (the “IRISL”), or (c) any other entity determined to be owned or controlled by the Government of Iran, the NITC or the IRISL.

A person is deemed to have actual knowledge that a vessel is owned, operated, or controlled by the Government of Iran, the NITC or the IRISL if the International Maritime Organizational vessel registration identification of the vessel is (i) included in a list of specially designated nationals or blocked persons maintained by OFAC or the Department of the Treasury for activities with respect to Iran, or (ii) identified by OFAC as a vessel in which the Government of Iran, the NITC or the IRISL.

It is important to note that there is an exception for underwriters and insurance providers exercising due diligence with regard to the transportation of crude oil from Iran. As such, sanctions may not be imposed with respect to a person providing underwriting services, insurance or reinsurance if it is determined that the person has exercised due diligence in establishing and enforcing official policies, procedures and controls to ensure that the person does not provide underwriting services, insurance or reinsurance for the transportation of crude oil or refined petroleum products from Iran in a manner for which sanctions may be imposed.

Exports, Transfers or Transshipments

The export, transfer or transshipment of any goods, services, technology or other items to Iran which may materially contribute to Iran’s ability to: (i) acquire or develop chemical, biological or nuclear weapons or related technologies; or (ii) acquire or develop destabilizing numbers and types of advanced conventional weapons, must be disclosed by an issuer and may be punishable by sanctions.

Joint Ventures Relating to the Mining, Production or Transportation of Uranium

Engaging in a joint venture that involves any activity relating to the mining, production or transportation of uranium with: (i) the Government of Iran; (ii) any entity incorporated in or subject to the jurisdiction of Iran; or (iii) a person acting at the direction of or is owned or controlled by the Government of Iran, must be disclosed by an issuer and may be punishable by sanctions.

The Transfer of Weapons or “Sensitive Technology” to Iran

Transferring or facilitating the transfer to Iran, any entity organized under the laws of Iran or otherwise subject to the jurisdiction of the Government of Iran, or any national of Iran, for use in or with respect to Iran, of (i) firearms, ammunition, bullets, chemical sprays, etc., which the President of the United States determines will be used to commit human rights abuses, or (ii) “sensitive technology” such as hardware, telecommunications equipment or other technology which the President of the United States determines is to be used specifically to restrict the flow of unbiased information in Iran or to otherwise disrupt, monitor or restrict speech of the people of Iran, must be disclosed by an issuer and may be punishable by sanctions. Likewise, providing any services that facilitate the activities listed above is also prohibited.

Disclosure Obligations in SEC Filings with Regard to Activities with Iran

If a covered person has engaged in any of the activities listed above, the issuer must disclose a detailed description of each such activity, including:

  • the nature and extent of the activity;
  • the gross revenues and net profits, if any, attributable to the activity; and
  • whether the issuer or the affiliate of the issuer (as the case may be) intends to continue the activity.

If a covered person engaged in any of the activities required to be disclosed: (i) the issuer must report the information required relating to the subject activity in its annual or quarterly reports covering the period in which the activity took place; AND (ii) if an issuer reports that a covered person has knowingly engaged in the aforementioned activates, the issuer must separately file with the SEC, concurrently with the annual or quarterly report, a notice that the disclosure of that activity has been included in that annual or quarterly report that identifies the issuer and contains the information that is required to be disclosed. The SEC has advised that filing an IRRANOTICE form can be done in a letter format to be filed on EDGAR under the “IRANNOTICE” heading.

Issuers must comply with the new Section 13(r) requirements commencing with quarterly and annual reports filed after February 6, 2013 (the date that is 180 days after the enactment date of the ITRA). The SEC has clarified in certain interpretive guidance that an issuer cannot avoid providing the necessary disclosures required by Section 13(r) by filing its reports early – noting that the disclosure requirements apply to reports filed on or before February 6, 2013, so long as the due date for the report under the SEC rules is after February 6, 2013 (e.g., reports on Form 10-K or 20-F for 2012 calendar year filers).

Further, an issuer is required to make the disclosure required by Section 13(r) for the entire period covered by the report and not only for the period following the enactment of the ITRA in August of 2012.

The SEC also confirmed that the definition of “affiliate” for the purposes of the new Section 13(r) is the same as defined in Exchange Act Rule 12b-2, namely, a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.

Finally, the SEC clarified that disclosure pursuant to Section 13(r) is required only if the issuer or any of its affiliates have engaged in any of the activities specified in Section 13(r) during the period covered by the report. The issuer does not have to include a statement that issuer or its affiliates have not engaged in any of the activities specified in Section 13(r) if they have not done so.

What Happens after the Issuer Discloses Activity to Iran to the SEC?

Upon receiving a notice that an annual or quarterly report includes disclosure of an ITRA-prohibited activity, the SEC must promptly transmit the report to: (i) the President of the United States (i.e. the Department of Treasury, the Department of State or any other such executive agency as appropriate); (ii) the Committee on Foreign Affairs and the Committee on Financial Services of the House of Representatives; and (iii) the Committee on Foreign Relations and the Committee on Banking, Housing and Urban Affairs in the Senate. The SEC will also make the information disclosed by the issuer and the notice received from the Issuer publicly available by posting the information on the SEC’s website (EDGAR).

Upon receipt of the report from the SEC (other than a disclosure of an activity with the Government of Iran without the specific authorization of a federal department or agency), the President of the United States is obligated to initiate an investigation into the possible imposition of sanctions under the ITRA. No later than 180 days after initiating such an investigation, the President is obligated to make a determination with respect to whether sanctions should be imposed with respect to the issuer or the affiliate of the issuer (as the case may be).

Applicable Sanctions for Violations of the ITRA

The ITRA broadens the sanctions regime against Iran by increasing the number of sanctions to be imposed by the United States government from three (3) to five (5) sanctions per violation for anyone found to knowingly engage in prohibited activities with Iran and also expands the types of sanctions that may be imposed by the United States government.

U.S. Parent Companies May Incur Liability for the Activities of their Foreign Subsidiaries

Under the ITRA, U.S. persons and entities are subject to sanctions in respect of the involvement of their foreign subsidiaries in restricted activities with Iran. Under the ITRA, the President is now required to prohibit an entity owned or controlled by a U.S. person and established or maintained outside of the United States from knowingly engaging in any transaction directly or indirectly with the Government of Iran that would be prohibited pursuant to the International Emergency Economic Powers Act (“IEEPA”) if the transaction were engaged in by a U.S. person or in the United States. Thus, if a non-U.S. subsidiary knowingly is involved in prohibited activity, the U.S. parent may now be subject to sanctions. The purpose of this provision is to restrict U.S. companies from circumventing regulations and avoid sanctions by having a foreign subsidiary conduct business activities with Iran that it could not engage in directly or through a U.S. subsidiary. The ITRA contains a provision allowing a U.S. person or entity to divest and terminate its business with certain of these foreign entities before February 10, 2013. Even after such divestment or termination, a reporting obligation may still exist for the issuer, but without the prospect of additional sanctions.

List of Sanctions Available under the ITRA

The following is a list of sanctions available to the United States government under the ITRA for restricted dealings with Iran:

  • Prohibition of the assistance of Export-Import Bank of the United States to sanctioned persons;
  • Imposition of export sanctions;
  • Prohibition of loans from United States financial institutions to sanctioned persons;
  • Prohibitions specific to financial institutions;
  • Procurement sanctions whereby the United States government may not procure goods or services from a sanctioned person;
  • Prohibition of transactions in foreign exchange that are subject to the jurisdiction of the United States;
  • Prohibitions in banking transactions such as credit transfers to the extent such transactions are subject to the jurisdiction of the United States;
  • Prohibition against property transactions whereby the President may prohibit the acquisition, use or transfer of property that is subject to the jurisdiction of the United States against a sanctioned person;
  • Ban on investment in equity or debt of sanctioned person: The President, pursuant to such regulations or guidelines, may prohibit any United States person from investing in or purchasing significant amounts of equity or debt instruments of a sanctioned person;
  • Exclusion of corporate officers: The President may direct the Secretary of State to deny a visa to, and the Secretary of Homeland Security to exclude from the United States, any alien that the President determines is a corporate officer or principal of, or a shareholder with a controlling interest in, a sanctioned person;
  • Sanctions on Principal Executive Officers: The President may impose on the principal executive officer or officers of a sanctioned person, or on persons performing similar functions and with similar authorities as such officer or officers, any of the sanctions under this subsection;
  • Sanction for concealing Iranian origin of crude oil and refined petroleum products: the United States government may prohibit a vessel owned, operated, or controlled by a person, including a controlling beneficial owner, with respect to which it has imposed sanctions for concealing the Iranian origin of crude oil and refined petroleum products and that was used for the activity for which it imposed those sanctions, from landing at a port in the United States for a period of not more than two years after the date on which the sanctions were imposed; and
  • Imposition of Sanctions with Respect to the Provision of Vessels or Shipping Services to Transport Goods Related to the Proliferation or Terrorism Activities in Iran: The United States government may block the assets and impose other sanctions on a person who “knowingly sells, leases or provides a vessel or provides insurance or reinsurance or any other shipping service for the transportation to or from Iran of goods that could materially contribute to the activities of the Government of Iran with respect to the proliferation of weapons of mass destruction or support of acts of international terrorism.” This provision applies to: (i) a person that sold, leased or provided a vessel or provided insurance or reinsurance or another shipping service; or (ii) any person that is a successor entity to such person providing the services, owns or controls the entity providing the services (i.e. a parent company) or had actual knowledge or should have known that the person sold, leased, or provided the vessel, insurance, reinsurance or other shipping service or is owned or controlled by, or under common ownership or control with the person providing the services (i.e. a subsidiary), or if the subsidiary knowingly engaged or should have known that the parent engaged in the activity.

Conclusion

The ITRA imposes new and more stringent sanctions on entities that are found to be engaged in activities with Iran that are prohibited by the United States government. One of the main implications of the ITRA is that companies that file reports with the SEC must disclose their activities with Iran in their filings – and such disclosure may lead to public embarrassment and the imposition of sanctions.

If you have any questions or concerns about U.S. sanctions against Iran generally, the implications of the ITRA or disclosure requirements pursuant to Section 13(r) of the Exchange Act, please contact your Seward & Kissel attorney.