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White Reviews Staff's Top Global Initiatives at PLI Conference

John White, the director of the SEC's Division of Corporation Finance, reviewed the staff's agenda relating to the global securities markets at the Practising Law Institute's April 30, 2008 conference on foreign issuers and the U.S. securities laws. The Division last fall decided it was an opportune time for updating the rules governing foreign private issuers, he said. The current focus is on amending rule 12g3-2(b), adopting reporting enhancements and amending the cross-border tender offer rules.

White also reviewed developments since the adoption of amendments to the SEC's deregistration rules, which he said was one of last year's most important initiatives. As expected, a number of companies took immediate advantage of the amendments, he said. Fifty-five companies deregistered last June, 28 more in the third quarter, 17 in the fourth quarter and 15 in the first quarter of this year. Fifty-seven of the companies that deregistered were from the European Union. Since the adoption of the amendments, White noted that 90 new foreign private issuers have registered, 10 of which did so in 2008.

The SEC's rule 12g3-2(b) exemption permits a nonreporting foreign private issuer to exceed the registration thresholds of 1934 Act section 12(g) and have its equity securities traded on a limited basis in the over-the-counter market. The SEC has proposed to eliminate the current requirement for paper disclosure of information. Instead, issuers would be required to electronically publish specified documents in English. The amendments would provide for an automatic exemption under the rule as long as certain conditions are met. The conditions would not depend on the number of U.S. security holders.

The comment period closed April 25. White said the proposal generally has been well-received with one exception. Some commenters opposed the provision under which the exemption would no longer be available if the average daily trading volume of the subject security in the U.S. for the most recently completed fiscal year is greater than 20% of the average daily trading volume of the security on a worldwide basis for the same period. White said the staff expects to make a recommendation to the Commission in the next couple of months.

The foreign issuer reporting enhancement release includes nine separate proposals affecting foreign private issuers, including a new definition of those entities. The proposal would shorten the reporting period for Forms 20-F from six months to 90 days for large accelerated filers and accelerated filers. The comment period closes on May 12. There have not been many comments yet, according to White, but some have expressed concern about the shorter filing period for Forms 20-F. It may not be workable for some filers. White said one suggestion was to make the filing period compatible with the home country requirement, but that proposal would pose a number of problems.

The Division has completed a review of the cross-border tender offer rules and has prepared a recommendation for consideration by the Commission, according to White. He said it is one of the Division's top priorities and could become a rule proposal very quickly. The proposal addresses areas of conflict and inconsistency in practice, he said. White believes the current rules have worked well in principle by including U.S. shareholders in foreign transactions, but said they could function better. The proposal may codify the current no-action and exemptive relief that has become common in these transactions. White said the goal remains to facilitate the ability of U.S. investors to exercise their rights in connection with cross-border mergers and acquisitions.

White said the proposal may include about 12 general areas and a variety of subsets when it is presented to the Commission. He hopes the Commission will consider the proposal as soon as possible.

White also touched on the concept of mutual recognition which must take into account other countries' disclosure regimes, corporate governance and financial reporting infrastructure. He noted that Senator Jack Reed (D-RI) has expressed misgivings about this initiative and has questioned its timing, given the recent turmoil in the markets.

John Huber, a partner with Latham & Watkins LLP, commented that the cross-border rules work well because the staff makes them work well with no-action and interpretive letters. When that is the case, Huber said the SEC needs to adopt new rules. He noted that Senator Reed also believes that the SEC is moving too fast on IFRS. Huber said the Commission is not moving too fast. It is riding a wave, he said, and it is important that the SEC be at the peak of the wave.