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White Reviews Initiatives Affecting Foreign Issuers at PLI Conference

John White, the director of the SEC's Division of Corporation Finance, cleared up two points of confusion during remarks at the Practising Law Institute's program on foreign issuers and the U.S. securities laws. First, with respect to the SEC's announcement that it will propose rules to allow the use of international financial reporting standards and eliminate the reconciliation to U.S. GAAP in 2009, White said companies may still choose to continue to report based on their home country GAAP. If they choose home country GAAP, however, they would have to reconcile their financial statements to U.S. GAAP. The second clarification is that when the SEC refers to IFRS, it is referring to IFRS as published by the International Accounting Standards Board, according to White.

White noted that in the weeks preceding PLI's conference, the SEC issued a number of press releases that affect foreign issuers. While White has been an enthusiastic supporter of the roadmap for ending the reconciliation of IFRS with U.S. GAAP, he said the SEC's press release showed the Commission's support of the initiative as it laid out the steps for moving forward, including a related concept release on treating domestic and foreign issuers the same with respect to the use of IFRS.

White said the recent adoption of rules to ease the deregistration process for foreign private issuers is not intended to encourage them to leave. He hopes the rules improve the total picture for foreign companies as they contemplate coming to the U.S. markets.

White said the staff is also in the home stretch for adopting management guidance relating to internal controls over financial reporting, with an informal meeting date scheduled for May 23. The PCAOB is expected to meet shortly after that to adopt Auditing Standard No. 5. When scoping for their section 404 audits, foreign registrants should look to the underlying financial statements in the GAAP pursuant to which they have been prepared, rather than to the U.S. GAAP reconciliation, according to White. At the same time, he said the reconciliation cannot be ignored.

White believes the section 404 transition relief for newly public companies could help foreign private issuers planning an initial public offering or a listing for the first time. These companies would not have to prepare a section 404 report until the second year. The transition period will help companies coming into the U.S. markets since they will not have to gear up for the section 404 compliance at the same time. That eases the timing decision, in his view.

The SEC's proposal with respect to the use of IFRS is of the most current interest to foreign companies, according to White. Many companies report using IFRS as modified by their home country rules, White explained. The SEC will not end the reconciliation requirement for modified IFRS. The SEC's focus is on one globally accepted IFRS, not multiple versions.

When the Division reviews filings using IFRS, White said the staff is looking for a faithful application of the standards. The staff is not trying to interpret IFRS or to change its application. White referred to the protocol the SEC signed with the U.K. Financial Services Authority and the U.K. Financial Reporting Council to implement a work plan with the Committee of European Securities Regulators to share information on the application of IFRS by issuers listed in the U.K. and registered with the SEC.

The SEC's proposed concept release will enable the SEC to gather information about extending the use of IFRS to domestic registrants. The concept release indicates that the idea is in a very early stage, he said. Some have already objected to the idea, he said, but the staff is just now beginning to think about it. Ultimately, White said that market forces will drive companies to a given accounting system.

White also mentioned a few changes the staff is considering with respect to small business capital raising and private offerings. If any changes are made to rule 144, he said it could affect international offerings under Regulation S. If the SEC revises Regulation D to allow for enhanced solicitation, it could result in parallel changes to 144A.

White also highlighted the improvements to the Corporation Finance Web site which involved the elimination of outdated material and the provision of updated content. There is a link relevant to foreign private issuers, he added.

Jacquelyn Lumb