Risk & Compliance

Frank Slams SEC Terror Tool

The chairman of the House Financial Services Committee calls for new methods and more accuracy.
Alan RappeportJuly 13, 2007

Rep. Barney Frank (D-Mass.), chairman of the House Committee on Financial Services, is the latest critic of the Securities and Exchange Commission’s new terrorism tool.

On Friday Frank’s office released a letter to SEC chairman Christopher Cox criticizing the tool for listing companies that no longer have relationships with state sponsors of terrorism, as well as companies with negligible business ties to such countries.

“I hope you will give serious consideration to devising either a more rigorous, materiality-based methodology for developing the list you are presenting to investors or else eliminating the webpage entirely,” wrote Frank. “Disclosure is important, but in this instance it is my belief the disclosure needs to be absolutely accurate or not occur at all.”

The SEC launched the tool late last month. The Website highlights companies listed on U.S. exchanges that had dealings with Iran, Sudan, North Korea, Syria, or Cuba.

“No investor should ever have to wonder whether his or her investments or retirement savings are indirectly subsidizing a terrorist haven or genocidal state,” Cox said in June. “The law already requires companies to report on any material activities in a country the Secretary of State has formally designated a State Sponsor of Terrorism. Our role is to make that information readily accessible to the investing public.”

The tool has drawn loud criticism from companies on the list and international business groups arguing that the SEC’s threshold for listing a company, which many consider a “blacklist,” is unclear, misleading, and outdated. For instance, if a company writes in an annual report that it had previously “divested” from one of the five countries, it would still appear on the SEC’s list.

The SEC is holding firm. “This is the information that companies put in their reports for investors to see,” John Nester, the SEC’s spokesman, told CFO.com. “There’s no reason for the SEC to step in and interpret the information.”

Research firms that assist in “terror-free” investing tend to use more nuanced benchmarks to determine which companies should make such a list. Frank wrote in his letter that the House Financial Services Committee is considering the Iran Sanctions Enabling Act, which would list companies active in that country’s energy sector. The act would have a $20 million threshold for inclusion on the list. Frank said that decision was “out of consideration for the competitive standing of the U.S. capital markets.”

The SEC does not comment on letters it receives, but it has maintained that it uses the newest information companies produce in their public filings and that it has no plans to alter the tool.

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