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Report Spotlights Lack of Homeland Security Disclosure

Authors of a new study on the lack of full disclosure about material homeland security matters by public companies believe existing rules require this information in the description of their business, any legal proceedings and the Management's Discussion & Analysis sections of their SEC filings. The Center for American Progress yesterday released the report which suggests that the SEC could put companies on notice that this disclosure is required or adopt new requirements specifically related to homeland security. The authors noted that nearly 90% of the critical infrastructure in the U.S. is owned by the private sector, much of which may be a target for terrorists. The Center hosted a panel discussion on the report's findings.

P.J. Crowley, a senior fellow and the director of national defense and homeland security at the Center, said the private sector has adapted the least to the post 9/11 environment. Al Queda's playbook has not changed, he said, and the private sector remains very much at risk. Crowley said that markets value efficiency more than security. The report's authors, Robert Housman and Timothy Olson, recommend a market-based approach through private sector reporting. Crowley suggested that boardrooms need to pay more attention to homeland security.

Housman said that he and Olson reviewed hundreds of companies, but focused on about 40 in diverse industries such as Microsoft, Disney and DuPont. The authors found that disclosure about homeland security varies widely, but there is little that is substantive. He noted that Disney, an iconic U.S. company with "no-fly rules" similar to the White House, has no mention of homeland security in its filings. Companies with nuclear facilities and insurance companies, two other high risk industries, may include a single mention of terrorism in a laundry list of risks, he added.

The report suggests that the SEC could use its "bully pulpit" to demand better disclosure. The rules already exist, in the authors' view, so the SEC is squandering an enormous opportunity to apply them through filings reviews, comment letters and interpretive guidance. Housman said that enforcement actions are a less preferable approach. Alternatively, the SEC could issue rules specific to homeland security, similar to the environmental risk disclosure rules, he said.

Joanne Rutkowski, with Baker Botts, said that the SEC's Y2K interpretive guidance could serve as a model, even though it was directed at a specific point in time and the terrorist threat is ongoing. The Y2K guidance called on companies to disclose their potential risks, the costs of mitigating the risks and their contingency plans if their systems failed.

Joe Whitley, formerly the general counsel for the Department of Homeland Security, noted that DHS operates with an "encouragement model," but the SEC "has some teeth." He believes the SEC should review the authors' report and offer feedback.

Jamie Gorelick, a partner with Wilmer, Cutler, Pickering, Hale & Dorr who also served on the 9/11 Commission, agreed that the goal of improved disclosure is very important. She said the insurance industry could play an important role since its job is to assess risk and put a price on it. Gorelick added that standards are needed for the targeted industries in order to trigger a boardroom discussion if a company does not meet the standards.

Gorelick said that government needs to play a role in bringing industry groups together because it is against nature for competitors to voluntarily come together to discuss their weaknesses. She favors the idea of the SEC using the bully pulpit to encourage better disclosure. Materiality is a very elastic term, she said, so the SEC could provide examples. Gorelick said she would not be inclined to support anything more prescriptive. She explained that she does not like social engineering through securities rules. Gorelick added that this is not an area of expertise of securities lawyers. The government has to fill the gap by identifying what the threats are.

Whitley said the industry should develop its own standards. There has to be a balance between the public's right to know and providing a roadmap to Al Queda, he said.

The report is titled "New Strategies to Protect America: A Market-Based Approach to Private Sector Security." Housman is the founder and principal of The Housman Group. Olson is an adviser to Chesapeake Green Fuels and previously worked in the SEC's enforcement division. The Center is a nonpartisan research and educational institute.