A Securities and Exchange Commission plan to revise the reporting requirements for foreign private issuers is drawing both cheers and jeers from the issuer community.
As part of a broader effort to modernize its rules that apply to FPIs, the SEC in February proposed a series of measures—dubbed the Foreign Issuer Reporting Enhancements, or the FIRE rules—that most notably would shorten the deadline for annual reports filed on Form 20-F. Comments on the proposals were due May 12.
Predictably, commenters panned the idea of giving less time to prepare and file Form 20-F. The Commission’s plan would cut the filing time from six months to 90 days for accelerated filers, and to 120 days for all other FPIs.
In a May 2 letter, the law firm Shearman & Sterling said accelerated deadlines “would provide another incentive for FPIs to avoid the U.S. capital markets, resulting in fewer protections afforded to investors under the U.S. federal securities laws and continued erosion of the competitive position of the U.S. markets in the global financial markets.” The firm suggested the SEC leave the filing date for non-accelerated FPI filers unchanged and shorten it to May 15 (based on a Dec. 31 fiscal year-end) for all other FPIs.
The SEC had argued that the shorter deadlines were reasonable based on advances in filing technology and because many FPIs already file annual reports in their home countries on faster schedules anyway. Accelerated domestic filers also must file annual reports on Form 10-K in 90 days or less, too, and the SEC is making a concerted push to equalize the playing field for foreign and domestic filers alike.
Still, many commenters noted that the proposed 90-day time frame for larger companies is shorter than the deadline under at least some issuers’ home country filing requirements. For example, most European Union member states mandate publication of an annual report within four months of year-end.
One rationale for giving FPIs longer filing deadlines had been because they also had to file a statement reconciling their own reports to U.S. Generally Accepted Accounting Principles. But the SEC abolished that requirement last year for companies that file financial statements according to International Financial Reporting Standards, eliminating that as a reason for giving FPIs more time.
Some commenters countered that many FPIs aren’t yet eligible for that break. FPIs that prepare their home country reports in a foreign language also still have to prepare English translations or summaries of those documents. The International Bar Association, for example, suggested the SEC adopt a deadline of four months from the fiscal year-end “which is on par with the majority of foreign jurisdictions.”
Kelley
Kevin Kelley, a corporate lawyer with the law firm Gibson Dunn & Crutcher, says the ideal solution is a series of deadlines to let the FPI first worry about filing in its own country and then quickly pivot to worry about its U.S. filings. “Under no circumstance ... should the U.S. filing date be so early that it precedes the local filing date,” he says. He recommends giving an extra 30 days to file financial reports in the United States. “Forcing the two filings to occur at the same time could degrade the quality of issuer focus on the U.S. filing,” he says.
FPI COMMENTARY
The following excerpts were taken from individual comment letters in regard to FPIs.
The proposal to shorten the Form 20-F reporting deadline, by as much as half from the current six-month deadline, would have the most significant effect on practice of any aspect of the Proposal. We strongly support the efforts of the SEC to achieve timelier financial reporting by foreign private issuers. Since establishment of the six-month deadline nearly 30 years ago, information that could affect the market for a foreign private issuer’s securities, including information released by the issuer itself, is now more readily available on a more timely basis to investors around the world. At a March 2007 SEC Roundtable, investors and analysts indicated that they use financial statements prepared in accordance with home country generally accepted accounting principles (“GAAP”) for their analyses, because these financial statements are released far earlier than the Form 20-F filing with the same financial statements reconciled to United States (“U.S.”) GAAP. Accelerating the Form 20-F deadline would provide U.S. investors with more timely, and as a result more useful, information.
Ernst & Young
While we support the acceleration of the due date for annual reports on Form 20-F, we believe the filing deadline should be within 120 days after the issuer’s fiscal year-end for all foreign private issuers. We believe a single due date simplifies compliance and monitoring and allows foreign private issuers adequate time to translate information and either reconcile to or prepare U.S. GAAP financial statements, if applicable. We also believe that it provides greater consistency with local statutory deadlines, while providing U.S. investors with more timely information than is currently available. While it is our view that the benefits of more timely reporting will outweigh potential cost or resource concerns for foreign private issuers, we believe the Commission should obtain input from the investor community about the relative benefits of such an acceleration.
PricewaterhouseCoopers
Contrary to the proposed amendments to Rule 12g3-2(b) (see Release No. 34-57350, and the Securities Law Committee’s comment letter), this proposal will provide greater certainty to foreign private issuers as to their status and will allow them to better react to and prepare for a change in status should it take place ... However, we believe that the Commission should first consider whether additional rulemaking in this area is productive at this time, or whether such initiatives, on the heels of significant regulatory change in the United States and abroad may not present the risk of regulatory fatigue. We believe that constantly changing requirements discourages issuers who take their obligations seriously and who strive to comply fully (for example, by adding the requirement for segment reporting and eliminating Item 17). We also think that, perhaps most importantly, the additional rulemaking distracts from the more fundamental goal of achieving mutual recognition and convergence.
International Bar Association
While we support many of the proposed changes, the Commission should not adopt the proposed
changes to the Form 20-F filing deadlines. The Commission has consistently recognized the
importance of balancing the sometimes competing objectives relating to the need for timely flow
of public company information to investors, the need for accurate and complete disclosures and
the imposition of undue burden and expense on issuers. Based on our representation of FPIs
located in numerous jurisdictions, we believe the filing deadline proposals would impose an
undue burden and expense on many FPIs for the reasons discussed below. In our view, these
burdens and costs significantly outweigh any benefits that this proposal is intended to provide
investors.
Shearman & Sterling
Source
Security and Exchange Commission (2008).
Others, including the Organization for International Investment, an association of U.S. subsidiaries of companies based abroad, suggested any change in the reporting deadline should be linked to the deadline for publishing annual financial statements in the issuer’s home country.
Sussman
Allen Sussman, a former SEC enforcement lawyer and now a partner in the law firm Reed Smith, says tying the filing deadline to the home country deadline “does make sense” and would alleviate most issuers’ concerns, but the resulting varying deadlines could confuse investors, he says.
“There wouldn’t be a uniform deadline investors could rely upon,” Sussman tells Compliance Week. One possible solution is to designate a spot on the cover page of the form where companies would indicate their filing deadline each year. Sussman also notes that the SEC would need a way to enforce the various filing deadlines. He suggests the SEC or some other group could track and periodically publish a list of overseas filing deadlines.
NYSE Euronext, owner of the New York Stock Exchange, said the SEC should wait to move up any deadlines until more progress is made in adopting IFRS worldwide, including in the United States.
“The Commission should not aggressively shorten the Form 20-F filing period without further substantial progress toward a unified system of financial reporting and an international harmonization of disclosure requirements,” wrote May Yeager, NYSE Euronext assistant secretary.
Sussman agrees. “The deadline acceleration may be a good idea, but it might be a bit premature,” he says. “They might be better off waiting until IFRS adoption is further along.”
Other Points of Discussion
Meanwhile, commenters welcomed a proposal that would permit foreign issuers to test their qualification to use the forms and rules available to FPIs annually, rather than on a continuous basis as is currently required.
The Organization for International Investment says a change to annual testing “will provide foreign companies increased certainty and predictability with regard to their reporting status and obligations.” That change “should remove a disincentive” for foreign companies registering with the SEC, “thereby enhancing the attractiveness of the U.S. capital markets and improving the competitiveness of such markets vis-à-vis other capital markets.”
Sussman agrees that change is “a big plus” that brings the requirements for FPIs more in line with those of domestic issuers and creates more certainty.
The proposals would also eliminate an instruction to Item 17 of Form 20-F that permits certain FPIs to omit segment data from their U.S. GAAP financial statements. The Organization for International Investment said that would impose burdens on the FPIs that rely on Item 17 “without offering meaningful additional benefits to investors.”
As more countries adopt or permit the use of IFRS, the Organization noted, fewer FPIs will be required to provide any U.S. GAAP reconciliation, making the differences between the Item 18 presentation and the Item 17 presentation less relevant.
“Changing practice now would bring significant burdens” to FPIs that have relied on the ability to prepare the more limited reconciliation under Item 17, particularly for smaller issuers and FPIs that don’t access the U.S. capital markets through registered offerings, the group said in its letter.
The proposals would also amend Exchange Act Rule 13e-3, which pertains to going-private transactions by FPIs or their affiliates, to incorporate recently adopted deregistration and termination-of-reporting rules applicable to foreign private issuers.
The SEC also sought comment on other possible amendments, including requiring disclosures related to changes in or disagreements with an issuer’s certifying accountant, fee payments, and other charges relating to American Depositary Receipts; information on how some issuers’ corporate governance practices differ from domestic requirements; and information about highly significant, completed acquisitions.
“In general those changes wouldn’t be unduly burdensome and are designed to bring foreign issuer requirements more closely in line with domestic issuers,” says Sussman.
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