updated 1/18/2008 1:27:44 PM ET 2008-01-18T18:27:44

An effort by U.S. regulators to flag companies doing business in countries with ties to terrorism amounts to a "blacklist" that should be abandoned, according to trade groups representing U.S. and foreign multinational firms.

The controversy centers on an online tool that the Securities and Exchange Commission debuted last year — and quickly yanked —  to identify companies with ties to countries designated as terrorism sponsors. When the tool came under fire, the SEC pulled it from its Web site and sought public input on its approach.

As originally designed, the tool identified companies whose most recent annual reports disclosed business activities in any of the five countries the U.S. State Department currently lists as terrorist sponsors —  Cuba, Iran, North Korea, Sudan and Syria.

Critics say the tool was a clumsy one that lumped together companies reporting former business activities in such countries along with those that are operating in Sudan at the encouragement of the U.S. government.

"It was a disaster," said National Foreign Trade Council President Bill Reinsch. The group, whose members include U.S. multinationals such as Citigroup Inc., General Electric Co. and Wal-Mart Stores Inc., opposes any push to revive the tool.

Reinsch, a Commerce Department undersecretary during the Clinton administration, said the SEC's effort thrust it into moral judgments about "who's a good guy and who's a bad guy," something he said is best left to individuals, not corporate executives or pension fund managers charged with maximizing value for investors.

The Organization for International Investment, which represents more than 150 companies, including BASF Corp., Shell Oil Co. and Volvo Group North American Inc., also opposed the approach in a letter this week to the SEC, saying it could harm companies and investors.

OFII's President and Chief Executive Todd Malan likened the online tool to a giant highlighter pen used to spotlight a small group of companies, and called that a big departure from the SEC's traditional role as a "politically neutral" regulator.

"No matter what the SEC may do to try to counteract this impression, we believe it is inevitable that some investors will perceive the tool as a list of companies that should be viewed with suspicion," Malan wrote.

Faced with the prospect of being included on what essentially amounts to a blacklist, companies may be far less forthcoming with information on their activities in or connections with the five countries in question, Malan added. Investors don't seem keenly interested in this kind of information, and those who want it can find it easily and don't need the SEC's help to do so, corporate critics agree.

"We don't see investor demand for it," said Reinsch. "There hasn't exactly been a groundswell of support for getting out of certain countries."

The SEC has received a handful of comments thus far on the matter; the comment period closes on Tuesday.

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