(The article featured below is a selection from SEC Filings Insight, which is available to subscribers of that publication.)

Commenters Oppose U.S. Trading Limit for Foreign Issuer Exemption

While commenters generally support an SEC proposal to reduce the burdens of complying with an exemption for foreign private issuers under section 12(g) of the 1934 Act, the SEC's proposed average daily trading volume ("ADTV") threshold remains a concern. The SEC's proposal, Exemption from Registration under Section 12(g) of the Securities Exchange Act of 1934 for Foreign Private Issuers (Release No. 34-57350), would only apply to securities where the ADTV for the most recent fiscal year has been no greater than 20% of the worldwide ADTV for the same timeframe. A number of comments sent to the SEC urged a change to the ADTV standard.

Currently foreign private issuers are eligible for an exemption from having to register a class of securities under section 12(g) if they submit to the SEC certain information published outside the U.S. This information must be submitted to the SEC on paper. The proposed amendment would end the paper requirement and would require the issuer to publish electronically and in English specific non-U.S. disclosure documents.

In requesting comments, the SEC specifically asked for views on the ADTV threshold, and whether another quantitative measure would be better. A 5% threshold was part of a March 2007 amendment adopted by the Commission to allow a foreign private issuer to claim the rule 12g3-2(b) exemption upon the effectiveness of the termination of its 1934 reporting and registration requirements under new 1934 Act rule 12h-6. The SEC believes thresholds are a better indicator of U.S. market interest in the foreign securities than a count of the issuer's shareholders. The 20% ADTV in the current proposal would be calculated in the same fashion as under rule 12h-6.

The Forum for U.S. Securities Lawyers in London ("Forum") commented that for foreign private issuers with less liquid securities, the 20% ADTV threshold could cause a loss of the exemption through events that the issuer has no control over. The comment letter gave as an example unsponsored American depositary receipts ("ADRs") facilities or block trades that settle in the U.S. The letter suggests the Commission consider linking the exemption to affirmative acts on the part of the issuer to access the U.S. capital markets in a public manner before such issuer were to become subject to the section 12(g) regime. The letter also notes that the proposal would require the ADTV to include both on-market and off-market trades in the U.S. In some markets it is difficult to access off-market trading data, which may lead to a skewing of the ADTV to indicate higher U.S. trading volume than is actually the case. The letter suggests allowing issuers to exclude all off-market trades from the ADTV test if such data is unavailable or incomplete, or allowing the optional inclusion of such data if available. The Forum includes DLA Piper, Dorsey & Whitney, Herbert Smith, Kirkpatrick & Lockhart Preston Gates Ellis, Lovells, Simmons & Simmons and White & Case.

The Int'l. Bar Ass'n. ("IBA") wrote that foreign companies are currently not required to register under section 12 unless they engage in a public offering or list on a national securities exchange, and these actions are under the company's control. The company cannot, however, control where its shares are traded, the letter adds. The proposed 20% threshold runs counter to the original purpose of the exemptive relief for issuers who have never sought a public market in the U.S., it continues. If the current proposal is enacted, issuers might seek to block U.S. investors, in an effort to keep the ADTV figure down, to the detriment of those in the U.S. wishing to invest in that issuer. If the SEC decides to go forward with the 20% threshold, the IBA suggests doing so only for issuers that were previous 1934 Act reporting companies or that have one or more registered offerings, or issuers with sponsored, unrestricted ADR programs as proposed by European issuers. It also suggests raising the 20% level to 50%.

The Security Traders Ass'n. of New York strongly opposes linking the exemption to the 20% ADTV threshold. This requirement would likely cause business currently conducted by U.S. broker-dealers to move outside the U.S., the association writes. Since trading volume is fluid and out of the issuer's control, issuers may avoid the 20% mark by taking actions to reduce U.S. trading, the comment letter continues. U.S. investors wishing access to the foreign securities may be forced to open foreign brokerage accounts, the association believes.

The American Bar Ass'n. also opposes the 20% proposal, and urges the SEC, if it adopts a quantitative standard, to consider grandfathering those companies currently claiming the rule 12g3-2(b) status.