The Sudan Accountability and Divestment Act (SADA); Part 2

On the last day of 2007, President Bush signed the Sudan Accountability and Divestment Act (SADA), 50 U.S.C. § 1701, which has several provisions. First, it “supports the decision” of state and local governments to divest from companies with “direct” business operations in oil, mineral extraction, power production or production of military equipment in Sudan when information about those companies is from “credible information available to the public.” Second, it provides a safe harbor from civil, criminal or administrative breach of fiduciary duty claims for fund managers who disclose that they are divesting in targeted companies operating in Sudan. The Securities and Exchange Commission (SEC) is directed to prescribe regulations to require disclosure of divestment policy in the company’s “next periodic report.” SADA also allows employee benefit plans as defined by the Employee Retirement Income Security Act (ERISA) to divest without liability. Finally, it prohibits government contracts with companies that conduct business in Sudan in the targeted sectors.

The SEC determined that periodic reporting would occur for unit investment trusts on item 133 of form N-SAR and on item 6(b) of form N-CSR for management investment companies. If an investment company continues to hold partially-divested securities, the report must disclose what remains held. A company is not required to disclose divestments, but the safe harbor provisions do not apply unless a company discloses. Both forms terminate a year after SADA terminates, which is thirty days after the President certifies to Congress that Sudan has ceased objectionable activities.

Impetus for the safe harbor provision of SADA came as a result of Fidelity shareholders proposing resolutions asking that Fidelity fund boards screen out investments in companies that, in the boards’ opinions, substantially contribute to genocide. Fidelity sought a SEC no-action letter to allow exclusion of the proposals on the basis that investment decisions are part of ordinary business and that the statement is misleading in violation of Rule 14a-9. The SEC, with little explanation, declined to issue a no-action letter. The proposal was included in proxy statements with a management recommendation opposing it on the basis that the proposal “would limit investments by the Fund that would be lawful under the laws of the United States” and that shareholders have other investment options. The proposals failed, but had affirmative votes ranging between 19% and 31%. Several Fidelity funds did not reach the quorum required to take a vote.

The statement that fund managers generally make in response to requests for any type of humanitarian investment policy is that limiting the universe of investment possibilities may lower profitability, and fund managers have a fiduciary duty to maximize profitability. Fund managers, however, are not liable to shareholders for decisions made in the ordinary course of business, including decisions about what to invest in if within the range of investments outlined in the prospectus and updated on a regular basis. In other words, fund managers have wide discretion about what investments will be held in a fund portfolio. Rule 14a-8 allows fund managers to exclude a shareholder proposal if it “deals with a matter relating to the conduct of the ordinary business operations of the issuer”; but managers cannot exclude proposals that involve social policy concerns as these are considered by the SEC to be “substantial policy considerations.”

According to Investors Against Genocide, over 100 funds have received proposals for genocide-free investment since SADA was passed. Many funds do not have votes scheduled, but TIAA-CREF and The Investment Company of America have votes scheduled for the summer of 2009 and genocide-free investment proposals pending. Three investment companies have filed N-CSRS forms stating their anti-genocide investment policy: Claymore, Calvert, and Domini. These are all socially-responsible investment companies whose initial investment policies include social interest criteria that already preclude investment in genocide-supporting companies. No “regular” fund seems to have made use of SADA’s safe harbor provision, although several—most famously Berkshire-Hathaway—have decided to divest from companies in Sudan.