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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Opening Remarks at the SEC Open Meeting


Elliot Staffin

Special Counsel, Division of Corporation Finance
U.S. Securities and Exchange Commission

Washington, D.C.
December 13, 2006

Thank you, John, Chairman, Commissioners. I will get straight to the details of the reproposed rules. At the core of the reproposed exit regime is Exchange Act Rule 12h-6, which would permit an eligible foreign private issuer to terminate its registration of a class of equity securities under Exchange Act section 12(g) or its section 15(d) reporting obligations regarding a class of equity or debt securities, rather than merely suspend those reporting obligations, as is currently the case under section 15(d). Under reproposed Rule 12h-6, a foreign private issuer would be eligible to terminate its Exchange Act reporting obligations regarding a class of equity securities if, regardless of size, it met a quantitative benchmark, which is not based on a direct head count of its shareholders, as are the current exit rules, or on the size of its U.S. public float, as was the originally proposed rule. An issuer of equity securities would be able to terminate its Exchange Act registration and reporting obligations, assuming it met the other conditions of Rule 12h 6, if the average daily trading volume of the subject class of securities in the United States has been 5 percent or less of the average daily trading volume of that class of securities in the issuer's primary trading market during a recent 12-month period.

Although the Commission expressed some reservation at the initial proposing stage about relying solely on trading volume data as the basis for a new exit standard, in light of all of the comments received, we believe that a reconsideration of that position is in order. One advantage of a benchmark based solely on trading volume is that it is a fairly direct measure of U.S. market interest in a foreign private issuer's securities at a particular time. Another advantage is that trading volume data for the U.S. and an issuer's primary market is easier to obtain and confirm than is the data required for a U.S. public float or record holder determination. As commenters have noted, it is difficult for a reporting foreign private issuer to determine accurately the U.S. residency of its holders under the current record holder test. A public float benchmark would also require such a determination. The reproposed benchmark, based solely on trading volume, should result in reduced costs to issuers in determining whether they can terminate their Exchange Act reporting obligations.

We believe the reproposed rules appropriately provide meaningful protection of U.S. investors in several ways. First, they permit deregistration only by foreign registrants in whose securities relative U.S. market interest is low. Second, as reproposed, if an issuer has delisted a class of equity securities from a U.S. exchange, and at the time of delisting, it exceeded the trading volume threshold, the issuer must wait at least a year before it may terminate its Exchange Act reporting obligations in reliance on the trading volume standard. The purpose of this proposed condition is to prevent Rule 12h-6 from creating an incentive for a foreign private issuer to delist its securities from a U.S. exchange for the purpose of decreasing its U.S. trading volume at a time when the U.S. market for its securities is still relatively active.

Similarly, under reproposed Rule 12h-6, an issuer that has terminated a sponsored American Depositary Receipts facility must wait 12 months before it may proceed to terminate its reporting obligations in reliance on the trading volume provision. The termination of an ADR facility can have a detrimental impact on ADR holders, resulting in additional fees and, when investors are cashed out, unplanned tax consequences. The reproposed rule should encourage foreign issuers to maintain their ADR facilities, even after delisting from the U.S. market.

Other conditions applicable to equity securities registrants reflect those contained in the initial proposal, with changes made in response to comments. For example, reproposed Rule 12h-6 would require an equity securities registrant not to have directly or indirectly sold its securities, with certain exceptions, in the United States in a registered offering under the Securities Act during the preceding 12 months. This dormancy condition is designed to deter a foreign private issuer's promotion of U.S. investor interest through recent, public capital-raising before exiting our reporting system. Unlike the originally proposed rule, however, reproposed Rule 12h-6 would permit an issuer to engage in exempted securities transactions during this period in order to discourage foreign companies from going offshore for their financing, to the detriment of U.S. investors and U.S. broker-dealers.

In addition, Rule 12h-6 would require an issuer of equity securities during the preceding 12 months to have maintained a listing of the subject class of securities in a foreign jurisdiction that, either singly or together with one other foreign jurisdiction, constitutes the primary trading market for the issuer's securities. This foreign listing condition, together with the U.S. trading volume benchmark, underscores our belief that, before a foreign private issuer may terminate its Exchange Act reporting obligations under Rule 12h-6, it must be subject to an ongoing disclosure and financial reporting regime, and have a significant market following, in its primary trading market, to which an investor may turn for information following the issuer's exit from the U.S. reporting regime. In order to address commenters' concerns that some issuers have listings in more than one jurisdiction, we have revised the definition of primary trading market to include up to two jurisdictions as long as trading volume in one of the jurisdictions is greater than U.S. trading volume.

We are recommending expanding the scope of the originally proposed Rule 12h-6 in two respects. First, a foreign company that terminated or suspended its Exchange Act reporting obligations under the current rules before the effective date of the new rule would be eligible to obtain the benefits of termination under Rule 12h-6. Second, a foreign issuer that has succeeded to the Exchange Act reporting obligations of an acquired company would be eligible to terminate those reporting obligations under Rule 12h-6 shortly after succession.

Finally, the reproposed rule amendments would enable a foreign private issuer to claim the exemption under Exchange Act Rule 12g3-2(b) immediately upon its termination of reporting regarding a class of equity securities under Rule 12h-6. In order to maintain the exemption, a foreign private issuer would have to publish in English the material home country documents required by Rule 12g3-2(b) on its Internet website or through an electronic information delivery system that is generally available to the public in its primary trading market. This provision would benefit U.S. investors who seek to continue to invest in the securities of a former Exchange Act reporting foreign company by helping to ensure that material information about the company and its securities is available in English and readily accessible. In order to bolster U.S. investor benefits, we recommend permitting all companies that obtain the Rule 12g3-2(b) exemption upon application to the Commission, and not just through Rule 12h-6, to maintain the exemption through the Internet posting of material home country documents.

Because of the advanced stage of this rulemaking, we are recommending a 30 day comment period. We are now ready to take your questions.


Modified: 12/14/2006