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SEC Proposes Amendments Affecting Foreign Private Issuers

The SEC will seek comment on a number of rule amendments affecting the filings of foreign private issuers and on amendments to Part 2 of Form ADV relating to the disclosure filed by registered investment advisers. At the open meeting, the SEC also approved an order to reflect its review of the Financial Accounting Standards Board's annual accounting support fee as required by the Sarbanes-Oxley Act.

The proposed amendments to Exchange Act Rule 12g3-2(b) are intended to address global and technological changes since the rule was adopted. Rule 12g3-2(b) exempts foreign private issuers from registering their equity securities with the Commission as long as certain conditions are met. Foreign private issuers currently submit written materials to the SEC on paper outlining their non-U.S. disclosure obligations. The materials include information about their U.S. shareholders and any disclosure documents they have published since the beginning of their most recent fiscal year.

The proposed amendments would eliminate the paper filing requirements by automatically granting the Rule 12g3-2(b) exemption to issuers that meet the specified conditions. To qualify for the exemption, the issuer must not have any reporting obligations under Sections 13(a) or 15(d) of the Exchange Act. The issuer must maintain a listing of the subject securities on exchanges in one or two foreign jurisdictions that comprise its primary trading market.

The U.S. trading volume must be no greater than 20 percent of the issuer's worldwide trading volume for its most recently completed fiscal year. The issuer may also claim the exemption in connection with its deregistration under Exchange Act Rule 12h-6. John White, the director of the Division of Corporation Finance, said the staff proposed the trading volume as a condition rather than an issuer's shareholder base because it is easier to determine and parallels the decision the SEC made with respect to the foreign deregistration rules.

The amendments would require foreign private issuers to publish their non-U.S. disclosure documents in English on an ongoing basis. The disclosure could be posted on an Internet Web site or though an electronic information delivery system similar to EDGAR. Paul Dudek, chief of the Office of International Corporation Finance, advised that most foreign issuers have Web sites and other countries have systems similar to EDGAR. To maintain the exemption, issuers must continue to publish the required disclosure documents, maintain their foreign listings, continue to meet the trading volume threshold for the most recently completed year and not otherwise incur Exchange Act reporting obligations.

The proposal contemplates a three-year transition period for issuers that would lose their exemptions based on the trading volume threshold. Issuers would have to register under Exchange Act Section 12 if they no longer qualify for the exemption at the end of the three-year period. The proposal calls for a three-month transition period during which the SEC would continue to accept paper submissions under Rule 12g3-2(b). At the end of the three-month period, paper would no longer be accepted.

The SEC is also proposing to accelerate the reporting deadline for foreign private issuers' annual reports that are filed on Form 20-F from the current six months to 90 days after the fiscal year end. The requirement would affect large accelerated filers and accelerated filers. All other issuers would file 120 days after the fiscal year end. The proposal contemplates a two year transition to accelerated filing.

Commissioner Paul Atkins asked whether the 90-day filing requirement was a shorter filing period than other countries require. Director White said the European Union requires filings in 120 days under its transparency directive. Canada has a 90-day filing window, except for smaller companies which have 120 days. Commissioner Atkins predicted a fair amount of comments on the proposal. White advised that a number of foreign issuers currently file their Forms 20-F before the six month deadline.

Under the proposal, foreign companies could 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 as currently required. The proposal reflects the same requirement for the determination by domestic companies of their accelerated filer status or smaller reporting company status. If a company no longer qualifies as a foreign private issuer, it would have to comply with the full reporting regime, including the proxy rules, Form 8-K and Section 16. The proposal allows six months before the issuer must comply with the domestic reporting regime.

Another proposal would eliminate an instruction from Form 20-F Item 17 that permits certain foreign private issuers to omit segment data from their U.S. GAAP financial statements. Chief Accountant Wayne Carnall advised that few companies use Item 17 today.

The SEC is also proposing to amend Exchange Act Rule 13e-3 to include references to the deregistration and termination of reporting rules that apply to foreign private issuers. The SEC will seek comments on whether to require foreign private issuers to disclose in their annual reports whether they had any disagreements with their certifying accountant. Comments will also be sought on whether to require disclosure about fees, payments and other charges related to American Depositary Receipts.

Commenters' views will also be sought with respect to the disclosure of certain corporate governance matters and information on the completion of significant acquisitions. The comment period on both proposals will be open for 60 days.