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SEC Adopts Proposals to Modernize Rules Governing Foreign Private Issuers

The SEC voted this week to adopt rule and forms amendments designed to ease the disclosure requirements for foreign private issuers and to improve U.S. investors' access to the disclosure documents of foreign companies. Division of Corporation Finance Director John White said that although the amendments have not garnered as much attention as last year's deregistration rules, they are just as important to the smooth functioning of the securities laws pertaining to foreign private issuers.

The Commission amended 1934 Act rule 12g3-2(b), which exempts a foreign private issuer from having to register a class of equity securities under section 12(g) based on the submission to the Commission of certain information published by the issuer outside the U.S. The exemption allows a foreign private issuer to have its equity securities traded in the U.S. over-the-counter market without registration under section 12(g). The rule amendments eliminate requirements for foreign companies without SEC-registered securities to submit paper disclosures, and instead give investors instant electronic access to foreign company disclosure documents, in English, on the Internet.

SEC special counsel Elliot Staffin said that the staff believes the amendments will reduce the cost of compliance for foreign private issuers and provide more timely information to investors. Chairman Christopher Cox pointed out that improving the availability of disclosure documents also will increase the efficiency of price discovery for the subject securities.

A foreign private issuer claiming the rule 12g3-2(b) exemption must meet certain conditions, including maintaining a listing of the subject class of securities on one or more foreign exchanges in one or two jurisdictions constituting its primary trading market. In addition, an issuer must have published in English on its Web site or in an electronic format generally available to the public in its primary trading market, certain non-U.S. disclosure documents published since the beginning of its most recently completed fiscal year. The foreign private issuer also must not have any reporting obligations under 1934 Act sections 13(a) or 15(d).

The staff eliminated from the final rule its proposal to require that the U.S. average daily trading volume ("ADTV") of an issuer's class of equity securities in the U.S. be no greater than 20% of the ADTV of that class on a worldwide basis for the issuer's most recently fiscal year. Staffin said that most commenters opposed this condition, and the staff felt that eliminating the 20% ADTV condition was consistent with the protection of investors. Commissioner Kathleen Casey said that she was pleased that the final rule does not include the 20% ADTV requirement as it might discourage foreign issuers from establishing sponsored ADR facilities or otherwise engaging in exempted offerings in the U.S.

A second set of amendments, referred to as the foreign issuer reporting enhancements, shorten the deadline for annual reports on Form 20-K filed by foreign private issuers from six months to four months. This change is subject to a three-year transition period. Paul Dudek, head of the SEC's Office of International Corporation Finance, said that most major markets around the world use 90 days or four months as their deadline for annual reports, and the staff took this into consideration when drafting its rule change.

The rule amendments also enable foreign issuers to test their eligibility to use the special forms and rules available to foreign private issuers once a year, rather than continuously. The amendments enhance the disclosures a foreign private issuer provides to investors regarding any changes in and disagreements with its certifying accountant in its annual reports and registration statements. They also revise the annual report and registration statement forms used by foreign private issuers to improve certain disclosures provided in the forms.