SEC Proposes Overhaul for Foreign Issuers

The Securities and Exchange Commission has proposed a slate of changes for how foreign private issuers must report their financial statements, part of the agency’s continuing effort to keep the United States’ competitive edge in the world capital markets.

Among the changes proposed at an SEC meeting last week: ending a requirement that FPIs make paper submissions when seeking an exemption from registration and shortening the filing deadline for annual reports on Form 20-F. SEC staff members say the proposed amendments should give investors better access to a foreign issuer’s non-U.S. disclosure documents and reduce compliance costs for issuers.

The new reforms come on the heels of another gift from the SEC to foreign issuers: Those filing financial statements according to International Financial Reporting Standards no longer need to reconcile them to U.S. Generally Accepted Accounting Principles. The proposals are also a prelude to the opening of U.S. borders under a mutual recognition framework, which the SEC plans to propose this year. That would give foreign exchanges and brokers direct access to U.S. investors, under certain conditions.

“These are … a harbinger of things to come as the Commission rethinks entirely the regime that relates to foreign companies and foreign market intermediaries,” says Michael Zuppone of the law firm Paul, Hastings, Janofsky & Walker.

Mittelman

David Mittelman, counsel at the law firm Reed Smith and a former SEC lawyer, calls the proposals a “mixed bag” for foreign companies. “Some elements simplify and alleviate reporting burdens, while other elements change and expand disclosure requirements,” he notes.

Specifically, the SEC proposed to amend Rule 12g3-2(b) of the Securities Exchange Act, which exempts FPIs from having to register a class of equity securities under Section 12(g) based on the paper submission to the SEC of certain information published outside the United States. Currently, companies that have 300 or more U.S. shareholders must register with the SEC—even if they haven’t listed or done a public offering in this country­—unless they have that exemption.

The paper submission to get an exemption includes a list of the company’s non-U.S. disclosure obligations, information concerning U.S. shareholders, and copies of non-U.S. disclosure documents published since the beginning of its most recently completed fiscal year. Amendments proposed last week would eliminate the paper submission requirements and automatically grant the exemption to foreign issuers that meet the proposed eligibility criteria.

And rather than give the exemption based on a count of the company’s U.S. shareholders, companies would be eligible if the U.S. trading volume for the subject securities is 20 percent or less of its worldwide trading volume for its most recently completed fiscal year. The SEC adopted a similar trading volume test when it revamped its deregistration rules for FPIs last year.

Zuppone

Zuppone says the change should be “a welcome opportunity” for companies. “They can have a healthy U.S. shareholder base without worrying about becoming subject to full scale SEC registration and reporting,” he says.

In addition to the trading volume test, to be eligible to claim the exemption, an issuer also must not have any reporting obligations under Section 13(a) or 15(d) of the Exchange Act. Unlike the current rule, the proposed rule wouldn’t require an issuer to look back 18 months and determine whether it had any active or suspended reporting obligations. SEC staff say elimination of the waiting period should help hasten the electronic publishing of a foreign issuer’s non-U.S. disclosure documents.

Issuers must also maintain a listing of the subject securities on one or more exchanges in one or two foreign jurisdictions comprising its primary trading market. In addition, they must publish specified non-U.S. disclosure documents in English on the company Web site or through an electronic information delivery system available to the public in their primary trading market, unless claiming the exemption in connection with or recently following a deregistration.

The SEC staff proposed a three-year transition period for currently exempt issuers, who could lose the exemption on the effective date of the revised rule if they don’t satisfy the trading volume threshold. Those issuers would have to register under Exchange Act Section 12 (if they couldn’t qualify for the amended exemption) no later than three years from the effective date of the rule amendments. The proposal would also establish a three-month transition period following the rule’s effectiveness, when SEC would continue to process paper submissions under Rule 12g3-2(b).

While the new requirement to publish English-language informational reports will slightly increase the burden on some foreign companies, Mittelman says it is “far more investor-friendly than the current archaic system of difficult-to-find paper submissions stored in the SEC reading room.”

More Direct Disclosure

THE FPI UPGRADE

Below are some of the main points proposed by the SEC to enhance reporting for foreign private issuers:

permit reporting foreign issuers to assess their eligibility to use the special forms and rules available to foreign private issuers once a year on the last business day of their second fiscal quarter, rather than on a continuous basis, which is currently required;

accelerate the reporting deadline for annual reports filed on Form 20-F by foreign private issuers from six months to 90 days after the issuer’s fiscal year-end in the case of large accelerated filers and accelerated filers, and to 120 days after the issuer’s fiscal year-end for all other issuers, after a two-year transition period;

amend Form 20-F by eliminating an instruction to Item 17 of that Form that permits certain foreign private issuers to omit segment data from their U.S. GAAP financial statements; and

amend Exchange Act Rule 13e-3, which pertains to going private transactions by reporting issuers or their affiliates, to reference the recently adopted deregistration and termination of reporting rules applicable to foreign private issuers.

In addition, the Commission voted to solicit public comment on other possible amendments that would affect foreign private issuers. These matters include the following:

amend Form 20-F to require disclosure in annual reports filed on that Form about: any changes in and disagreements with the registrant’s certifying accountant; the fees, payments and other charges relating to American Depositary Receipts; certain corporate governance matters; and information about highly significant, completed acquisitions; and

eliminate the availability of the limited U.S. GAAP reconciliation option that is contained in Item 17 of Form 20-F for foreign private issuer registrants.

Source

Securities and Exchange Commission.

A second set of proposals, dubbed the Foreign Issuer Reporting Enhancements, would update Exchange Act filing requirements and enhance disclosure required by foreign private issuers. The amendments would accelerate the reporting deadline for annual reports filed on Form 20-F (the foreign issuer’s counterpart to U.S. companies’ 10-K report) from six months to 90 days after the fiscal year-end for large accelerated filers and accelerated filers, and to 120 days for all other issuers. FPIs would get a two-year transition period.

John White, director of the SEC Division of Corporation Finance, admitted that the new deadline may get some grumbling from FPIs, but said the current deadline—established nearly 30 years ago—is “frankly just outdated.” Currently, 20 percent of FPIs already file their 20-Fs within 90 days and one-third file within 120 days, he added.

Mittelman says the SEC in its final rule proposal may just decide that a foreign issuer must file its U.S. report at the same time as it files a report in its home country. “As a practical matter, linking the annual report due date to the home country deadline may not be far off the 90 and 120 proposed deadlines,” he says.

Bernstein

Andrew Bernstein, a partner in the Paris office of law firm Cleary Gottlieb Steen & Hamilton, expects the proposed deadline to be a sore point for some companies, since many issuers get more time to file annual reports in their home country than what the SEC is proposing for U.S. filings. For example, he says, the European Union deadline for companies to publish annual reports in their own language is four months after the end of the fiscal year.

“It’s clear that the SEC expects to get comments on that,” Bernstein says. “This could be viewed as an opening bid” for a different deadline in whatever final rule the SEC ultimately approves.

Bernstein expects companies in non-English-speaking jurisdictions to be especially eager for extra time beyond their home countries’ filing deadlines, so they can prepare accurate English translations.

“If the SEC changes the proposed deadline on Form 20-F, the overall the effect of these rule proposals will be positive,” Bernstein says. And if not? “They’re going to see a lot of unhappy foreign companies.”

Other proposed changes would:

permit reporting foreign issuers to assess their eligibility to use the special forms and rules available to FPIs once a year, on the last business day of their second fiscal quarter, instead of on a continuous basis, as currently required;

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; and

amend Exchange Act Rule 13e-3, which pertains to going private transactions by reporting issuers or their affiliates, to reference recently adopted deregistration and termination of reporting rules applicable to foreign private issuers.

The SEC also wants comment on other possible amendments, including amending Form 20-F to require disclosure about any changes in and disagreements with the registrant’s certifying accountant; fees, 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. The SEC also wants comment on eliminating the availability of the limited U.S. GAAP reconciliation option in Item 17 of Form 20-F.

Comments on both sets of proposals are due 60 days after publication in the Federal Register. The full text of the proposing releases will be posted to the SEC Website as soon as possible.