SEC Adopts Fund Disclosure Rules and Foreign Bank Loan Exemption; Proposes Shell Company Rules
FOR IMMEDIATE RELEASE
Washington, D.C., Apr. 13, 2004 -- The Securities and Exchange Commission today voted to adopt a rule and form amendments designed to provide foreign banks under certain conditions exemption from insider lending prohibitions; to propose for comment new rules regarding shell companies, "reverse mergers" and use of securities registered on Form S-8; and voted to adopt disclosure requirements for investment companies regarding their policies and procedures on market timing, fair valuation and selective portfolio disclosure.
1. Exemption of Foreign Banks from Provisions of Section 402 of Sarbanes-Oxley Act
The Commission voted to adopt a rule that would exempt foreign banks from the insider lending prohibition of Exchange Act Section 13(k), as added by Section 402 of the Sarbanes-Oxley Act. This Section prohibits both domestic and foreign issuers from making or arranging for loans to their directors and executive officers unless the loans fall within the scope of specified exemptions. One of these exemptions permits certain insider lending by a bank or other depository institution that is insured under the Federal Deposit Insurance Act. Foreign banks whose securities are registered with the Commission are not eligible for the bank exemption under Section 13(k). Rule 13k-1 would remedy this disparate treatment by exempting from the insider lending prohibition those foreign banks that meet specified criteria similar to those that qualify domestic banks for this statutory exemption. Consequently, the rule will establish a more level playing field for foreign and domestic banks regarding insider lending while remaining consistent with the goals of the Sarbanes-Oxley Act. Rule 13k-1 will also benefit investors by removing a regulatory impediment that, if left unchecked, could discourage foreign banks from entering or remaining in U.S. capital markets.
Rule 13k-1 will exempt from Section 13(k)'s insider lending prohibition loans by a foreign bank issuer to its insiders, as well as loans by a foreign bank to the insiders of an issuer that is the parent or other affiliate of the foreign bank, as long as two conditions are satisfied.
- either the laws or regulations of the foreign bank's home jurisdiction require the bank to insure its deposits or be subject to a deposit guarantee or protection scheme;
- or the Board of Governors of the Federal Reserve System has determined that the foreign bank or another bank organized in the foreign bank's home jurisdiction is subject to comprehensive supervision or regulation on a consolidated basis by the bank supervisor in its home jurisdiction under 12 CFR 211.24(c).
Second, the loan by the foreign bank to any of its directors or executive officers or those of its parent or other affiliate
- is on substantially the same terms as those prevailing at the time for comparable transactions by the foreign bank with other persons who are not executive officers, directors or employees of the foreign bank, its parent or other affiliate; or
- is pursuant to a benefit or compensation program that is widely available to the employees of the foreign bank, its parent or other affiliate and does not give preference to any of the executive officers or directors of the foreign bank, its parent or other affiliate over any other employees of the foreign bank, its parent or other affiliate; or
- has received the express approval by the bank supervisor in the foreign bank's home jurisdiction.
The Commission also decided to adopt an amendment to Form 20-F that will require a foreign bank issuer to provide substantially the same disclosure regarding specified loans to insiders as that required for domestic banks under Regulation S-K.
The exemption will be effective upon its publication in the Federal Register. The amendment to Form 20-F will take effect 30 days after its publication in the Federal Register.
2. Use of Form S-8 and Form 8-K by Public Shell Companies
The Securities and Exchange Commission voted today to publish for comment proposed rule and form amendments relating to public shell companies. The amendments would:
- prohibit shell companies from using Form S-8, the form used by public companies to register securities in connection with employee benefit plans under the Securities Act of 1933; and
- require a public shell company, when obligated to report a corporate event on Form 8-K that causes it to cease being a shell company to include the same type of information as it would be required to file to register a class of securities under the Securities Exchange Act of 1934.
The Commission proposed the amendments to assure that investors in shell companies that acquire operations or assets have access on a timely basis to the same kind of information as is available to investors in public companies with continuing operations. The proposals are intended to protect investors by deterring fraud and abuse in the securities markets through the use of shell companies.
The proposals would define the term "shell company" to mean a company with no or nominal operations, and with no or nominal assets or assets consisting solely of cash and cash equivalents. The definition would include foreign private shell companies, but the release solicits comment on the manner in which these companies should report the information that would be required on Form 8-K for a domestic shell company.
The proposed amendments to Form S-8 would allow a company that ceases to be a shell company to use Form S-8 to register securities 60 days after it has filed information equivalent to the information filed by companies registering a class of securities under the Exchange Act.
Comments on the proposed amendments are due within 45 days after publication in the Federal Register.
3. Disclosure Regarding Market Timing, Fair Value Pricing, and Selective Disclosure of Portfolio Holdings
The Commission voted to adopt amendments that are designed to improve transparency of policies and procedures of mutual funds and variable insurance products with respect to market timing. The amendments will also require mutual funds and insurance company managed separate accounts that offer variable annuities to disclose the circumstances under which they will use fair value pricing and to disclose their policies and procedures regarding disclosure of portfolio holdings.
Disclosure of Market Timing Policies and Procedures
The amendments will
- require a mutual fund to describe in its prospectus the risks, if any, that frequent purchases and redemptions of fund shares may present for other shareholders;
- require a mutual fund to state in its prospectus whether or not the fund's board of directors has adopted policies and procedures with respect to frequent purchases and redemptions of fund shares and, if the board has not adopted any such policies and procedures, state the specific basis for the view of the board that it is appropriate for the fund not to have such policies and procedures;
- require a mutual fund to describe with specificity in its prospectus any policies and procedures for deterring frequent purchases and redemptions of fund shares;
- require a mutual fund to describe in its Statement of Additional Information any arrangements to permit frequent purchases and redemptions of fund shares; and
- require similar disclosure for insurance company separate accounts offering variable insurance contracts.
Disclosure Regarding Fair Value Pricing
The amendments will clarify that mutual funds and insurance company managed separate accounts that offer variable annuities are required to explain in their prospectuses both the circumstances under which they will use fair value pricing and the effects of using fair value pricing.
Disclosure of Policies Regarding Disclosure of Fund Portfolio Holdings
The amendments will require mutual funds and insurance company managed separate accounts that offer variable annuities to describe in their Statements of Additional Information any policies and procedures with respect to the disclosure of portfolio securities and ongoing arrangements to make available information about portfolio securities to any person.
Initial registration statements, and post-effective amendments to effective registration statements, filed on or after December 5, 2004, must include the disclosure required by the amendments.
The full text of detailed releases concerning each of these items will be posted to the SEC Web site as soon as possible.