SIFMA Urges OFAC to Adopt a Standardized Sanctions Framework

SIFMA urged the Office of Foreign Assets Control ("OFAC") to overhaul its approach to capital markets sanctions, arguing that the current patchwork of restrictions has produced a perverse result: the sanctioned issuers suffer little, while U.S. pension funds, mutual fund holders and retail investors are left holding frozen, worthless positions.

In a white paper, SIFMA reviewed the capital markets sanctions program and proposed a standardized framework designed "to: (i) ensure that sanctions do not negatively impact U.S. investors; (ii) enable OFAC to implement capital markets sanctions in a more institutionalized and effective manner; and (iii) help U.S. firms understand their compliance obligations in the securities context."

SIFMA asserted that U.S. sanctions on foreign securities issuers are falling hardest on ordinary American savers — not on the companies and governments they are designed to target. SIFMA explained that when OFAC designates a foreign company or government as a sanctions target, it typically prohibits U.S. persons from trading the issuer's securities on secondary markets — even though, as SIFMA notes, secondary market trades transfer money between investors and never send new capital to the issuer. SIFMA argued that blocking that activity does nothing to financially harm the target, but it traps American investors in positions they cannot sell or receive income from. SIFMA cites its members' data to illustrate: after Russia sanctions took hold in early 2022, roughly 737 ETFs lost approximately $2.4 billion in net asset value, one firm alone has blocked distributions worth an estimated $3.8 billion owed to its customers, and another has $1.4 billion in frozen dividends sitting in accounts it manages. SIFMA said that Treasury acknowledged the weakness of secondary trading bans, noting when it relaxed Venezuela restrictions in 2023 that allowing such trading would provide "negligible financial benefit" to the sanctioned regime.

SIFMA's proposed remedy is a standardized framework, codified in OFAC's regulations, that would apply by default whenever new capital markets sanctions are imposed. SIFMA proposed: (i) generally permitting secondary market trading in pre-existing securities of sanctioned issuers; (ii) allowing open-ended divestment rights so investors can exit positions in their own time; (iii) building in delayed effective dates so firms can unwind in-flight trades and update compliance systems; and (iv) issuing a suite of standard general licenses covering dividend receipt, investment fund operations, depositary receipt programs, securities lending, and derivatives. SIFMA also urged OFAC to consolidate duplicative reporting obligations by placing the reporting burden on the primary custodian rather than every party in a securities custody chain. SIFMA framed the proposal not as a weakening of sanctions policy, but as a sharpening of it: a regime focused on denying issuers access to new capital in primary markets, SIFMA argued, would be both more effective and less harmful to the American investors who are currently paying a price they were never meant to bear.