	U.S. State Fund Managers and Investment Companies Have Sold Sudan-Related Assets for Varying Reasons

We found that several states have divested or frozen assets primarily  related to Sudan and that the value of U.S. investment companies’ Sudan- related asset holdings has declined considerably since March 2007. Our  survey responses show that state fund managers have divested or frozen  about $3.5 billion in assets primarily related to Sudan (see table 1). All of the states that reported having divested or frozen Sudan-related  assets had laws or policies regarding their Sudan-related assets, and the  state fund managers who responded to our survey cited compliance with  these laws and policies as their primary reason for divestment. Thirty-five  U.S. states have enacted legislation, adopted policies, or both, affecting  their Sudan-related investments. This decline cannot be  accounted for solely by changes in share price, indicating that U.S.  investors, on net, chose to sell shares of these companies. Most commonly, investors stated that they bought  and sold Sudan-related assets for normal business reasons, such as  maximizing shareholder value consistent with the guidelines in each fund’s  prospectus, as well as in response to specific client instructions. U.S. Investors Have Often Considered Three Factors When Determining Whether and How to Divest from Companies Tied to Sudan

We found that U.S. investors have often considered three factors when  determining whether and how to divest from companies tied to Sudan:  fiduciary responsibility, the difficulty identifying operating companies with  ties to Sudan, and the possible effects of divestment on operating  companies and the Sudanese people. Fiduciary Responsibility

Both state fund managers and private investment companies we contacted  told us that they consider whether a decision to divest Sudan-related  assets is consistent with fiduciary responsibility—generally the duty to act  solely and prudently in the best interests of the client. Private investment companies expressed differing perspectives on  whether divesting from Sudan is consistent with their fiduciary  responsibilities. However, our analysis of available lists indicates that they differ  significantly from one another. However,  the federal securities laws do not require companies specifically to  disclose operations in countries designated as state sponsors of terrorism. The company  did not provide a response to the request. The SEC also has the discretionary  authority to adopt a specific disclosure requirement for companies that  trade on U.S. exchanges (such as requiring disclosure of any operations in  state sponsors of terrorism). Although the SEC has not done so, it could  exercise this authority by issuing an interim rule for comment and a final  rule in the Federal Register. Our Analysis Indicates That the U.S. Government Has Complied with the Federal Contract Prohibition Provision of SADA

Our analysis indicates that the U.S. government has complied with SADA’s  federal contract prohibition. SADA seeks to  prohibit the U.S. government from contracting with companies that  conduct certain business operations in Sudan. In addition to the purchase orders with this company, we found that from  June 12, 2008 to March 1, 2010, the U.S. government awarded 756  contracts to 29 affiliates and subsidiaries of the companies identified in  the list as having prohibited business ties to Sudan. Our review of a nonrandom selection of contracts awarded to  these affiliates and subsidiaries indicates that the contractors provided the  necessary certification, when required. Therefore, for these specific  contracts, the U.S. government has complied with the contract prohibition  section of SADA. Additionally,  they must identify and evaluate conflicting sources of information about  which companies have Sudan-related business operations. GAO Recommends That SEC Consider More Complete Disclosure by Companies with Business Operations Related to Sudan

In our report released today, we recommend that, in order to enhance the  investing public’s access to information needed to make well-informed  decisions when determining whether and how to divest Sudan-related  assets, the SEC 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.
Why GAO Did This Study

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. This testimony (1) identifies actions that U.S. state fund managers and investment companies took regarding Sudan-related assets, (2) describes the factors that these entities considered in determining whether and how to divest, and (3) determines whether the U.S. government has contracted with companies identified as having certain Sudan-related business operations and assesses compliance with SADA's federal contract prohibition provision. This testimony is based on a GAO report (GAO-10-742), for which GAO surveyed states, analyzed investment data, assessed federal contracts, and interviewed government officials.

What GAO Found

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 and 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 lower 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. Although information directly provided by companies through public documents, such as Securities and Exchange Commission (SEC) disclosures, is a particularly reliable source of information, 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 nonrandom 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 SADA permits. The related GAO report recommends that the SEC consider issuing a rule requiring companies that trade on U.S. exchanges to disclose their business operations tied to Sudan, as well as possibly other state sponsors of terrorism. The SEC's Division of Corporation Finance agreed to present GAO's recommendation to the commission.