Shariah’s Black Box

Ultimately, the SEC did establish its Office of Global Security Risk whose mission and operational tack are described on its Internet site as follows:

The global risk environment has changed dramatically over the past few years, and continues to change almost daily as we learn of new or possible threats of terrorist activity around the world. The SEC and its Division of Corporation Finance have a unique role in seeking to enhance the investing public’s access to the information it needs about any public company to make an informed investment decision, including material information about global security risk.

The federal securities laws are premised on the idea that a company must disclose information that a reasonable investor would think is material, in light of the circumstances under which the disclosures are made (including the mix of information), in assessing an investment in the company. The Commission’s disclosure-based regulatory approach has served the investing public and this agency well over the years, and the standard for disclosure – that of materiality – has long been the foundation of the Commission’s work. We are committed to maintaining the materiality standard as the basis for our disclosure-based approach.

At the direction of Congress, we have established the Office of Global Security Risk within the Division of Corporation Finance. This office works closely with our Division review staff to monitor whether the documents public companies file with the SEC include disclosure of material information regarding global security risk-related issues. The staff of the Office of Global Security Risk is taking steps to apprise our Division review staff of significant developments in this area of which it becomes aware, and is thereby assisting the Division in maintaining high standards of review in considering these issues.[205]

What is clear from this analysis is that U.S.companies can no longer consider their associations with countries or entities tainted by terror a private, non-material, or irrelevant matter. While the courts have not yet entered the fray, the executive and legislative branches have laid down some markers. This analysis suggests that the closer a company gets to a “state sponsor of terror”, the more it has to disclose. Prudent counsel suggests that the closer a company gets to any association with terror, the more it has to disclose. The obvious question raised by the two proxy examples above would be: if a shareholder submits a proxy proposal to a publicly reporting financial institution involved in SCF requiring a full study of the risks associated with Shariah, will the company have legitimate grounds to argue that the risks of Shariah and its connection to terror are not relevant? Outside of the proxy arena, if a company engages in SCF and represents to the public that Shariah is a standard set by Shariah authorities relied upon by the company, has the company disclosed enough about Shariah to tell the whole story? Given the hypothetical this analysis has been working with, the answer would appear to be “no”.

The tide has certainly turned and 9/11 seems to have been a significant catalyst. Congress and the SEC are focusing on what kinds of disclosure are required when a U.S.public company operates in locations and deals with parties which implicate terrorism. Shareholders like the New York Citypension funds have also voiced their view that disclosing ties to terrorism are no longer subject to theoretical discussion but have become central to what shareholders expect in disclosure statements. While the SEC’s Office of Global Security Risk is focusing on links between U.S.businesses and terror-sponsoring regimes, the broader context of this focus suggests a fortiori that associational doctrinal relationships with terror and violence raise far more pressing issues of disclosure than mere geographical relationships.[206] Arguably, doing business in Iran is a lesser connection to terrorism than promoting a financial system initiated originally, and promulgated still, by politically minded “Islamists”[207] who seek the infusion of Shariah as a political-military mandate in the lives of all Muslims – meaning in their personal, commercial, and political lives — and which is in fact the doctrine pursued by al Qaeda and the other regimes, groups, and individuals supporting Jihad against non-Muslims and apostates in one form or another. The question whether the Shariah-terror link is sufficient to create a legal duty has not been formally decided but no marginally prudent legal adviser can responsibly ignore it. Further, the fact that the duty to disclose arises in the SCF context only after some initial representation about the company’s involvement with Shariah appears to lower whatever threshold question might exist in legal counsel’s calculus.[208]