SEC Rulemaking and Other Initiatives
May 12, 2017
The SEC has long recognized the important contributions that foreign issuers and foreign financial service providers bring to the US financial markets and to US investors. The SEC, in its domestic rulemaking, considers the impact of its rules upon foreign market participants active in US markets. The Commission also considers the manner in which its initiatives affect the cross-border activities of US issuers and US financial service providers. Highlighted below are certain recent rulemakings and other SEC initiatives where particular international considerations have been, or are being, addressed. Additional information about these and other rulemakings and agency initiatives in the substantive areas identified below can be found at the websites of the Division of Market Regulation, Division of Investment Management, Division of Corporation Finance, and the Office of the Chief Accountant.
Intermediaries and Markets
Investment Advisers and Hedge Funds
Issuer Disclosure and Reporting Obligations
Accounting and Auditing
Reforms under the Sarbanes-Oxley Act
- "Whistleblower Hotlines" — SOA Section 301
In January 2005, the Commission proposed new rules relating to the governance, administration, transparency, and ownership of self-regulatory organizations (SROs) that are national securities exchanges or registered securities associations. The proposals relate to the periodic reporting of information by these SROs regarding their regulatory programs. The proposals also address the listing and trading by SROs of their own or affiliated securities. In the proposing release, the Commission noted that it shares the goal of the international regulatory community in seeking greater convergence of robust standards for oversight of the securities markets, and recognizes that the proposals would impact foreign exchanges seeking to conduct business directly in the US market. Accordingly, the Commission specifically requested comment from foreign exchanges and market participants about these rule changes.
On September 29, 2006, President Bush signed into law the Credit Rating Agency Reform Act. This new law formalizes certain requirements that a credit rating agency (CRA) must have in order to apply for Nationally Recognized Statistical Ratings Organization (NRSRO) status. In particular, the CRA Reform Act requires any applicant for NRSRO-status to have 10 qualified institutional buyers certify that they have used the applicant's ratings for the past three years. The CRA Reform Act also requires the SEC to establish registration requirements for CRAs wishing to become NRSROs, mandates disclosures by NRSROs to the SEC, and gives the SEC powers to oversee conflicts of interest at NRSROs, including those that may undermine the quality of their ratings. The SEC must promulgate rules implementing this Act no later than 270 days after its enactment.
In December 2004, the IOSCO Technical Committee released its Code of Conduct Fundamentals for Credit Rating Agencies, which includes a set of provisions designed to protect investors and enhance market efficiency by improving the transparency by which CRAs decide on ratings and guard against conflicts of interest. Since the publication of this model code, most of the largest CRAs have adopted and published codes of conduct based on the IOSCO provisions. Following on this work, in 2006 the IOSCO Technical Committee agreed to assess (1) the degree to which CRAs have adopted codes of conduct in its member jurisdictions that reflect the provisions of the IOSCO CRA Code, and (2) whether any trends exist with regard whether CRAs consistently choose to “explain” (rather than comply with) specific provisions of the IOSCO CRA Code.
On December 27, 2006, the Commission proposed new rules designed to provide additional investor protections that would affect pooled investment vehicles, including hedge funds. The proposal includes a rule that would prohibit advisers, whether registered or not, to pooled investment vehicles from making false or misleading statements or otherwise defrauding investors or prospective investors in these vehicles. The proposed antifraud rule is aimed at resolving the uncertainty created by a recent opinion of the Court of Appeals for the D.C. Circuit. In Goldstein v. SEC, the court vacated a rule adopted by the Commission in 2004 that required certain hedge fund advisers to register under the Investment Advisers Act of 1940 (“Advisers Act”). In addressing the scope of the exemption from registration in section 203(b)(3) of the Advisers Act and the meaning of “client” as used in that section, the court expressed the view that, for purposes of sections 206(1) and (2), the “client” of an investment adviser managing a pool is the pool itself, not the investors in the pool. As a result, the opinion created some uncertainty regarding the application of the Advisers Act in certain cases where investors in a pool are defrauded by an investment adviser.
In addition, in August 2006, SEC staff issued a letter setting forth its view that most of the substantive provisions of the Advisers Act do not apply to offshore advisers with respect to such advisers’ dealings with offshore funds and other offshore clients. The letter confirmed that an offshore adviser registered with the Commission must comply with all of the Advisers Act and the rules thereunder with respect to any of its U.S. clients and any prospective U.S. clients.
For further information regarding investment advisers and hedge funds, please refer to the website of the Division of Investment Management.
Relief for First-time Application of International Financial Reporting Standards
To facilitate the transition to International Financial Reporting Standards (IFRS) by a growing number of SEC-registered foreign companies, effective May 2005, the SEC adopted amendments to provide a one-time accommodation relating to financial statements prepared for the first time under IFRS for foreign private issuers registered with the SEC. The accommodation permits eligible foreign private issuers for their first year of reporting under IFRS to file two years rather than three years of statements of income, changes in shareholders' equity and cash flows prepared in accordance with IFRS, with appropriate related disclosure. The accommodation retains current requirements regarding the reconciliation of financial statement items to US GAAP. This accommodation applies to foreign private issuers that adopt IFRS prior to or for the first financial year starting on or after January 1, 2007.
Termination of a Foreign Private Issuers Registration and Reporting Requirements
Under current SEC rules, a foreign private issuer may find it difficult to terminate its registration and reporting obligations under the Securities Exchange Act of 1934 despite the fact that there is relatively little interest in the issuer's securities among US investors. To address this and other concerns, on December 13, 2006, the Commission reproposed amendments to the rules governing when a foreign private issuer may deregister its securities under the Securities Exchange Act of 1934 and cease making filings with the Commission.
Currently, a foreign private issuer may exit the Exchange Act registration and reporting regime if the class of the issuer’s securities has fewer than 300 record holders who are US residents. The reproposed rule would permit the termination of Exchange Act reporting by a foreign private issuer that meets a quantitative benchmark designed to measure relative US market interest for that class of securities, which does not depend on a head count of the issuer’s US security holders. The reproposed rule would require a comparison of the average daily trading volume of an issuer’s securities in the United States with that in its primary trading market.
International Reporting and Disclosure Issues in the Division of Corporation Finance
- International Registered and Reporting Companies — Division of Corporation Finance
See also below the section on Sarbanes-Oxley Reforms.
For further information on issuer disclosure and reporting obligations, please refer to the website of the Division of Corporation Finance.
Convergence of Accounting Standards
For the past several years, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), the standards setters for US Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS), respectively, have been engaged in a project to converge the two sets of standards. The SEC staff has been very supportive of this project and, in April 2005, issued a "roadmap" of the precursor milestones to eliminating the US requirement that financial statements prepared under IFRS be reconciled to US standards in the financial disclosures of foreign companies selling shares in the United States. The staff's roadmap states that eliminating the reconciliation requirement will involve, among other things, a detailed analysis of the faithfulness and consistency of the application, interpretation and enforcement of IFRS in financial statements across companies and jurisdictions, combined with continued progress in the convergence work now being conducted by the IASB and FASB.
For further information on accounting and auditing, please refer to the website of the Office of Chief Accountant.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, which he characterized as "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt." The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the Public Company Accounting Oversight Board to oversee the activities of the auditing profession. All SEC rulemaking and reports issued under the Sarbanes-Oxley Act are available online.
In implementing the Act, the SEC was mindful of the impact of its rules on foreign issuers and market participants, particularly where conflicts with foreign law existed. Where possible, the SEC, as has been its historical practice, has afforded accommodations to foreign firms to avoid conflicts of law where consistent with the letter and spirit of the Sarbanes-Oxley Act. Dialogue with our foreign counterparts, including through roundtables and the comment letter process, was critical to these efforts.
This list of accommodations includes the following topics:
Internal Control over Financial Reporting (SOA Section 404)
Creation of the Public Company Accounting Oversight Board (SOA Title I)
Strengthening the Commission's Requirements Regarding Auditor Independence (SOA Title 2)
Listed Company Audit Committee Requirements (SOA Section 301)
Insider Trades during Pension Fund Black-Out Periods (SOA Section 306(a))
Implementation of Standards of Professional Conduct for Attorneys (SOA Section 307)
Conditions for Use of Non-US GAAP or Pro Forma Financial Information SOA (Section 401(b))
- Foreign Bank Exemption from the Insider Lending Prohibition (SOA Section 402)
- Article, "Statement by SEC Staff: A Race to the Top: International Regulatory Reform Post Sarbanes-Oxley," by Ethiopis Tafara, International Financial Law Review (September 2006).
For further information about Sarbanes-Oxley reforms, please refer to the website of the Division of Corporation Finance.
In April 2003, the SEC adopted a new rule to implement Section 301 of the Sarbanes-Oxley Act, which requires the audit committees of issuers listed on US exchanges to establish procedures for
"i. the receipt retention and treatment of complaints…regarding accounting, internal accounting controls or auditing matters; and
ii. the confidential, anonymous submission by employees of the listed issuer of concerns regarding questionable accounting or auditing matters."
Certain multinational issuers have alerted Commission staff that local laws, such as those relating to privacy, may influence the procedures established by the issuer to comply with Section 301, depending on the country in which the issuer operates. The Commission staff has corresponded with the EU Article 29 Working Party regarding Section 301 (as well as SEC Rule 10A-3, which implements Section 301) and EU data protection law. See "Opinion 1/2006 on the application of EU data protection rules to internal whistleblowing schemes in the fields of accounting, internal accounting controls, auditing matters, fight against bribery, banking and financial crime," letters to the SEC dated February 16, 2006 and July 3, 2006, and SEC staff responses dated June 8, 2006 and September 29, 2006.