April 8, 1999
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.; Stop 6-9
Washington, D.C. 20549
Re: Rule Proposal to Amend Form 20-F Disclosure Requirements and Revise the Definition of Foreign Private Issuer (Release Nos. 33-7637 and 34-41014; File No. S7-3-99)
Dear Mr. Katz:
The Financial Accounting Policy Committee (FAPC) of the Association for Investment Management and Research (AIMR) is pleased to comment on the Commission’s Rule Proposal to amend Form 20-F disclosure requirements to conform to the international disclosure requirements endorsed by the International Organization of Securities Commissions (IOSCO standards). The FAPC is a standing committee of AIMR, charged with maintaining liaison with and responding to the initiatives of bodies which set financial accounting standards and regulate financial statement disclosures. The FAPC also maintains contact with professional, academic, and other organizations interested in financial reporting.
The FAPC commends the Commission and strongly supports its proposal to require the IOSCO standards for foreign private issuers. These standards are an improvement over the Commission’s current requirements in Form 20-F, but still considerably less than the disclosures required by domestic registrants. Therefore, our endorsement is predicated on the condition that domestic registrants would not be allowed to adopt the less-stringent IOSCO disclosure requirements, but would continue to be required to follow current disclosure standards under Form 10-K. We are concerned that the Commission may come under pressure to allow the universal use of the IOSCO standards. We believe that the Commission should resist these pressures because application of the IOSCO standards to domestic registrants would result in a significant loss of information to U.S. investors.
Adoption of IOSCO International Disclosure Standards
Replacement of the current Form 20-F disclosure requirements with the IOSCO standards will greatly improve both the quantity and quality of the disclosures currently provided by foreign private issuers. We believe that the IOSCO standards will result in the availability of more comprehensive and comparable information for the analysis and valuation of securities issued by non-U.S. issuers as well as the comparison of such issuers with domestic issuers. However, we would like to reiterate that we do not consider the IOSCO standards to be of the same caliber as the Commission’s requirements for domestic issuers and would strongly oppose any changes to the latter requirements simply for the sake of global harmonization of disclosure standards.
We recommend that the IOSCO standards be adopted in their entirety without permitting limited adoption by foreign issuers who do not offer or list their securities in multiple jurisdictions. We believe that abbreviated disclosures (in whatever form) do not provide sufficient information for sound investment decisions. Limited adoption would not support the primary objectives for moving towards global uniform standards. While we understand that some non-U.S. issuers will be opposed to meeting the IOSCO standards, we believe that the efficient functioning of the financial markets requires that all issuers meet at least a minimum standard. The cost of compliance with IOSCO standards should be more than offset by a lower cost of capital as investors are more willing to invest in enterprises that provide better financial data.
However, while we support the adoption of the IOSCO standards, we believe they lack some important information. Therefore, we recommend future enhancements to the IOSCO standards that include the following changes and additional disclosures:
Item 7 – Major Shareholders and Related Party Transactions
Age of Financial Statements
Although the proposal requires that more timely financial statements be provided by foreign private issuers when registering with the Commission, these issuers are still permitted to make offerings based on information that may be extremely outdated. Given the increasingly rapid changes in today’s business world, investors need timely financial statements to assess an enterprise’s financial condition and make appropriate investment decisions. We recommend that financial statements be available three months, but certainly no later than six months, after the report date.
Over the past several years we have seen many countries with enterprises whose financial position deteriorated significantly over short-time periods. If investors are forced to rely on information that is 12 to 15 months old, they must base their investment decisions on outdated and irrelevant data and are likely to misjudge both the viability of the issuer and the value of its securities, frequently resulting in inappropriate investment decisions.
If foreign issuers want access to particular capital markets, we believe that they must conform to what those markets demand. The U.S. market has consistently shown that it wants transparent, comparable, and timely financial information. Therefore, we strongly recommend that the Commission move towards the same filing requirements for foreign private issuers as for domestic issuers.
Disclosure Standards to Cover All Types of Securities
Although the IOSCO standards were developed for cross-border common equity offerings, we believe the same disclosure standards and reporting requirements should apply to all types of securities. Investors in debt or preferred equity issues deserve access to financial information which is as comprehensive and timely as the information provided to investors in common equity issues. Further, the analysis of different types of securities differs more in emphasis than in information required. Requiring the same standards for all securities will prevent issuers from attempting to exploit any differences in disclosure requirements or reporting deadlines among different security classes.
Definition of "Foreign Private Issuer"
When determining whether a particular issuer qualifies as a "foreign private issuer," the calculation of the holdings of U.S. residents should not automatically assume that all ADR holders are U.S. residents. Canadians and other non-U.S. investors frequently hold ADRs to facilitate managing their foreign holdings. Similarly, beneficial owners of common equity shares may be U.S. residents. The assumption of U.S. ownership could result in an incorrect calculation. To achieve a more accurate measure of ownership by U.S. residents, issuers should look through the record of ownership of brokers, dealers, banks or other nominees holding customer securities to determine each customer’s residence. The issuer should also take into consideration residency information obtained from beneficial ownership reports filed with the Commission or otherwise provided to the issuer.
The Financial Accounting Policy Committee appreciates the opportunity to comment on the Commission’s proposal to adopt the IOSCO international disclosure standards for foreign private issuers. If any of the members of the Commission or its staff have questions or seek amplification of our views, we would be pleased to answer any questions or provide additional information you might request.
Gabrielle Napolitano, CFA
Financial Accounting Policy Committee
Gerald I. White, CFA
Financial Accounting Policy Committee
Patricia D. McQueen, CFA
Vice President, Advocacy, Financial Reporting & Disclosure
Association for Investment Management and Research
cc: AIMR Advocacy Distribution List
Michael S. Caccese, Senior Vice President, General Counsel & Secretary, AIMR
Georgene B. Palacky, CPA, Director, Advocacy Financial Reporting & Disclosure, AIMR