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US Securities and Exchange Commission

Ukrainian Group Ask SEC for Corporate Disclosure Rule Related to Russian Invasion

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

The Ukrainian American Bar Association petitioned the SEC to write a rule that would require public companies to disclose their business dealings with Russia and Belarus in light of Russian invasion of Ukraine.

The disclosure should include sales to and purchases from Russia, ownership of assets in Russia, and stakes in companies registered in Russia. Moreover, the petition asks for reasonable due diligence about their customers and suppliers to make sure that companies disclose amounts of indirect sales and purchases to and from Russia can be reasonably determined through diligence of respective supply chains.

The rules, the petition noted, should not only apply to Russia but also to all countries that are helping Russia in its war against Ukraine.

Former Minister of Finance of Ukraine Natalie Jaresko and Razom, Inc., a New York-based charity, which helps to support Ukraine, joined in the petition, filed with the SEC on April 14, 2022. The commission made the petition public on April 22.

In response to the invasion, some businesses said they would suspend, scale down, or exit the Russian market.

“These varying stances of issuers regarding their business in Russia and the choice of many to continue operating in and doing business with Russia makes information about such activities of vital importance to investors,” the petition states. “This information is vital because it provides disclosure to investors regarding the risks and costs of continuing to operate in a heavily sanctioned market ruled by a government moving to nationalize industry.”

The petitioners said that such disclosure will also make sure that companies are meeting complex sanction rules on their operations in Russia. Moreover, they said that companies are worried that Russia may impose its own counter-sanctions against companies that do not continue their operations fully.

“This proposed disclosure would help investors better understand the cost of doing business in Russia,” the petition states.

In further explaining their rationale for the rule, they said that business in or with Russia is material information regardless of the amount of business activity.

Analysts and investors use quantitative and qualitative measures when making investment decisions. But the groups noted that even if the business in or with Russia is deemed immaterial based on quantity, it is still material qualitative information.

This information will allow shareholders and investors to better understand the exposure of companies to costs and reputational risks in “a country ruled by an unpredictable authoritarian regime” subject to a growing list of sanctions.

The petitioners said that they are also concerned that Russia might nationalize or expropriate foreign businesses for support of its military needs.

The new disclosure will also help make sure that investors’ investments are not associated with or contributing to financing the war. The petition explains that any activity by companies results in taxes paid to the Russian treasury. That taxable activity can be in the form of operations in the country or trade with Russian businesses.

“Simply put, there is no bright line delineating any economic activity in and with Russia from the war perpetrated by its military,” they noted. “Financing of war crimes, directly or indirectly, has no materiality thresholds. Thus, it is critical for investors to understand issuers’ participation in and dealing with the Russian economy that ultimately finances Russian military.”

If the SEC writes the rule, it will also help investors to understand exposure of companies to boycotts stemming from their continued engagement in Russia. It will help investors understand exposure of companies to risks that employees in Russia face. Further, investors will be able to assess the quality of company management and board of directors.

Moreover, the rule will help shareholders to exercise their rights in submitting proposals about their ongoing business in Russia, the petition states. In addition, they noted that the new disclosure requirements will help protect human rights and lives.

“We believe that disclosure requirements may compel some issuers to discontinue business in and with Russia, which is associated with multiple business and reputational risks and increased costs due to sanctions, currency, and logistical constraints,” the petition states. “The petition is about material disclosures, not moral and values-based decisions or enforcement. Importantly, this proposal does not require issuers to become moral arbiters or make decisions based on morality and values, although a movement of modern businesses taking a position on environmental, social and governance issues (“ESG”) has been gaining steady traction.”

 

This article originally appeared in the May 3, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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