Sudan Divestment:

U.S. Investors Sold Assets but Could Benefit from Increased Disclosure Regarding Companies' Ties to Sudan

GAO-10-742: Published: Jun 22, 2010. Publicly Released: Sep 20, 2010.

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Recognizing the humanitarian crisis in Darfur, Sudan, Congress enacted the Sudan Accountability and Divestment Act (SADA) in 2007. This law supports U.S. states' and investment companies' decisions to divest from companies with certain business ties to Sudan. It also seeks to prohibit federal contracting with these companies. GAO was asked to (1) identify actions that U.S. state fund managers and investment companies took regarding Sudan-related assets; (2) describe the factors that these entities considered in determining whether and how to divest; and (3) determine whether the U.S. government has contracted with companies identified as having certain Sudan-related business operations and assess compliance with SADA's federal contract prohibition provision. GAO surveyed states, analyzed data on investment companies and companies with Sudan-related business operations, assessed federal contracts, and reviewed documents and interviewed officials from the Securities and Exchange Commission (SEC), among other federal agencies.

Since 2006, U.S. state treasurers and public pension fund managers have divested or frozen about $3.5 billion in assets primarily related to Sudan in response to their states' laws and policies; U.S. investment companies, which also sold Sudan-related assets, most commonly cited normal business reasons for changes in their holdings. State fund managers GAO surveyed indicated that their primary reason for divesting or freezing Sudan-related assets was to comply with their states' laws or policies. Thirty-five U.S. states have enacted legislation or adopted policies affecting their investments related to Sudan, primarily in response to the Darfur crisis, as well as in response to Sudan's designation by the U.S. government as a state sponsor of terrorism. GAO also found that the value of U.S. shares invested in six key foreign companies with Sudan-related business operations declined by almost 60 percent from March 2007 to December 2009. The decline cannot be accounted for solely by a reduction in stock prices for these companies, indicating that U.S. investors, on net, decided to sell shares in these companies. Investors indicated that they bought and sold Sudan-related assets for normal business reasons, such as maximizing shareholder value. U.S. states and investment companies have often considered three factors when determining whether and how to divest. First, they have considered whether divesting from Sudan is consistent with fiduciary responsibility--generally the duty to act solely and prudently in the interest of a beneficiary or plan participant. Second, they have considered the difficulty in identifying authoritative and consistent information about companies with Sudan-related business operations. GAO analyzed three available lists of these companies and found that they differed significantly from one another. While information directly provided by companies through public documents such as disclosures required by the SEC is a particularly reliable source of information on these companies, federal securities laws do not require companies specifically to disclose business operations in state sponsors of terrorism. The SEC has the discretionary authority to adopt a specific disclosure requirement for this information, but has not exercised this authority. Third, investors have considered the effect that divestment might have on operating companies with Sudan-related business activities, such as prompting companies interested in promoting social responsibility to leave Sudan, creating room for companies that do not share that interest to enter the Sudanese market. GAO's analysis, including a review of a non-random selection of contracts, indicates that the U.S. government has complied with SADA's contract prohibition provision. Specifically, the U.S. government has contracted with only one company identified on a widely-used list of companies with business ties to Sudan, and the contracts awarded to this company did not violate SADA. The U.S. government has contracted with subsidiaries and affiliates of companies with business ties to Sudan, as permitted under SADA.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: A senior official at Division of Corporation Finance reported that in 2011, in response to our recommendation, the SEC did consider issuing a rule requiring companies that trade on U.S. exchanges to disclose their business operations related to Sudan and Iran. Specifically, in the fall and spring of 2011, the SEC included an agenda item (item 3235-AL01) in the publicly available biannual Regulatory Flexibility Agenda ( stating that the Division was considering recommending that the Commission propose disclosure requirements relating to business and investment activities in Iran and Sudan. However, an SEC official said the consideration of a rule related to Sudan was overtaken by other events. The Regulatory Flexibility Agenda item 3235-AL01 was removed from the agenda in 2012, when the Iran Threat Reduction and Syria Human Rights Act of 2012 was enacted. While the new legislation resulted in a requirement that reporting companies disclose certain activities involving contacts with or support for Iran or other identified persons involved in terrorism or the creation of weapons of mass destruction, an SEC official said the legislation does not include reporting related to Sudan or other State Sponsors of Terrorism.

    Recommendation: In order to enhance the investing public's access to information it needs to make well-informed decisions when determining whether and how to divest Sudan-related assets, the SEC should consider issuing a rule requiring companies that trade on U.S. exchanges to disclose their business operations related to Sudan, as well as possibly other U.S.-designated state sponsors of terrorism.

    Agency Affected: United States Securities and Exchange Commission


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