SEC Proposes Numerous Changes to Foreign Issuer Disclosure and Reporting Requirements

February 20, 2008

At its open meeting on February 13, 2007, the SEC voted to propose several amendments to its disclosure and reporting requirements for foreign private issuers. The proposal follows a series of amendments that the SEC has made over the last year in order to modernize the foreign private issuer registration regime. Earlier such changes included new rules on de-registration and rules allowing certain foreign private issuers that report under International Financial Reporting Standards to avoid reconciliation to U.S. GAAP. The new proposals would offer certain benefits for foreign private issuers, such as more certainty in relation to the foreign private issuer definition and automatic availability of an exemption from U.S. reporting requirements for certain foreign issuers. However, the proposals also entail a number of potentially significant adverse consequences, in particular shortening of the period for filing annual reports on Form 20-F for foreign private issuers that are registered with the SEC, as well as the risk of becoming automatically subject to U.S. reporting rules for non-SEC registered foreign companies once the U.S. trading volume for their securities exceeds 20 percent of their worldwide trading volume in a given fiscal year.

Foreign Issuer Disclosure and Reporting Enhancements

As proposed, the principal disclosure and reporting enhancements are as follows: 

• The proposals would permit reporting foreign issuers to assess their eligibility to use the special forms and rules available once a year on the last business day of their second fiscal quarter. This would improve certainty for foreign private issuers that may be worried about continuously complying with the test for a “foreign private issuer”.

• The proposals would accelerate the reporting deadline for annual reports filed on Form 20-F from six months to 90 days after the issuer’s fiscal year-end in the case of large filers, and to 120 days after the issuer’s fiscal year-end for all other issuers, after a two-year transition period. This proposal is a significant change for many foreign issuers. While this proposal would bring filing deadlines closer to what is required for U.S. issuers (two months for accelerated filers’ annual reports on Form 10-K), it will likely raise significant objections from foreign issuers as many foreign jurisdictions have longer publication deadlines than those currently proposed by the SEC.

The proposals also contains a number of other amendments that have significant implications for the content of Form 20-F.

Important Changes to the Rule 12g3-2(b) Exemption

In addition to the reporting enhancement proposals, the SEC also proposed significant changes to SEC Rule 12g3-2(b) under the U.S. Securities Exchange Act of 1934 (known as the Exchange Act). Under the current rule, foreign issuers with fewer than 300 U.S. holders can apply for an exemption from the reporting requirements under Section 12(g) of the Exchange Act if they apply to the SEC before reaching that threshold at the end of a fiscal year. This exemption remains effective even if after they obtain the exemption the number of U.S. holders subsequently exceeds that threshold. 

As proposed, the revised exemption would abolish the 300-holder requirement and be tied simply to having an average daily U.S. trading volume of no more than 20 percent of the average daily worldwide trading volume for the issuer’s most recently completed fiscal year. Unlike the current rules, the new proposal would require foreign private issuers to qualify for the trading volume based exemption at the end of each year. Accordingly, if an issuer no longer satisfies the trading volume threshold at the end of a given fiscal year, it would have to register with the SEC under Exchange Act Section 12. Therefore, companies with a large U.S. investor base that were previously able to rely on a Rule 12g3-2(b) exemption may be concerned about their U.S. trading volume exceeding 20 percent without being able to control such trading. The SEC is proposing a three-year transition period for currently exempt issuers that could lose their exemption on the effective date of the revised rule, so that such issuers would have to register with the SEC no later than three years from the effective date of the rule amendments.

As proposed, the Rule 12g3-2(b) exemption would be granted automatically to a foreign private issuer that meets specified conditions and would no longer require submission of a paper filing as in the past. In order to benefit from this automatic exemption, the proposal requires that an issuer maintain a listing on one or more exchanges in foreign jurisdictions, including that comprising its primary trading market. In addition, an issuer must publish specified non-U.S. disclosure documents in English since the beginning of its most recently completed fiscal year on its Internet web site or through an electronic information delivery system that is generally available to the public in its primary trading market. 

The full text of the proposal relating to Section 12(g) was published on the SEC’s Web site on February 19, and the other proposals are due to be published shortly. Comments on the proposals have to be submitted no later than 60 days after publication in the Federal Register.