Speech by SEC Staff:
Opening Remarks at the SEC Open Meeting
Special Counsel, Division of Corporation Finance
U.S. Securities and Exchange Commission
March 21, 2007
Thank you, John, Chairman, Commissioners. We recommend that you adopt Exchange Act Rule 12h-6, which, compared to the current exit rules, will establish a more clearly defined process with a more appropriate benchmark by which a foreign private issuer can terminate its Exchange Act registration and reporting obligations. Under Rule 12h-6, a foreign private issuer will be eligible to terminate its registration of securities under Exchange Act section 12(g), or its reporting obligations regarding a class of equity securities under Exchange Act section 15(d), if it meets a quantitative benchmark, which is not based on a head count of its shareholders, as are the current exit rules. An issuer of equity securities will be able to terminate its Exchange Act registration and reporting obligations, assuming it meets 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 worldwide average daily trading volume of that class of securities for a recent 12-month period.
As the Chairman has noted, one advantage of a benchmark based solely on trading volume is that it is a more 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 is easier to obtain and confirm than is the data required for a 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 trading volume-based approach should result in reduced costs to issuers in determining whether they can terminate their Exchange Act reporting obligations.
Most commenters strongly agreed with the reproposed trading volume-based approach while offering suggestions to fine-tune that approach. We have incorporated some of these suggestions in the rules that are before you today. For example, under the final rules, an issuer would measure its U.S. trading volume as a percentage of worldwide trading volume, instead of trading volume in its primary trading market, as reproposed. Commenters noted that, since many issuers are listed on multiple foreign markets, a worldwide trading volume-based provision will provide a more accurate measure of relative U.S. interest in an issuer's securities.
As reproposed, the final rules require an issuer to include both on-exchange and off-exchange transactions when determining its U.S. trading volume. However, the final rules also permit the inclusion of off-exchange transactions when calculating worldwide trading volume if the information about the off-exchange transactions comes from sources that are reasonably reliable and is not duplicative of other trading volume data. Commenters noted that, at least for some issuers, reliable information concerning off-exchange transactions will be readily obtainable. This approach is consistent with a principles-based approach, which we believe is preferable to an approach that would require an issuer to obtain trading volume information from particular sources.
We believe the final 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, if an issuer has delisted a class of equity securities from a U.S. exchange, or terminated a sponsored American Depositary Receipts facility and, at the time of delisting or termination, 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 condition is to prevent Rule 12h-6 from creating an incentive for a foreign private issuer to terminate its U.S. trading facilities 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. However, in the interests of fairness, we recommend that the Commission not apply the delisting and ADR termination conditions to an issuer that delisted or terminated a sponsored ADR facility before today. Accordingly, the draft adopting release contains a transition provision.
Third, an equity securities issuer must have maintained a listing of the subject class of securities on one or more exchanges in its primary trading market for at least the 12 months before filing for deregistration under new Rule 12h-6. The purpose of this foreign listing requirement is to help assure that there is a foreign regulator overseeing the issuer, which makes more likely the availability of a set of non-U.S. disclosure documents to which U.S. investors may turn following the issuer's deregistration from the U.S.
Fourth, Rule 12h-6 will require an equity securities registrant not to have 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.
Fifth, an equity securities registrant will have to have been an Exchange Act reporting company for at least a year, to be current for that period, and to have filed at least one Exchange Act annual report before it may file for deregistration under the new rule. The purpose of this prior Exchange Act reporting condition is to provide investors in U.S. securities markets with a minimum period of time to make investment decisions regarding a foreign private issuer's securities based on the information provided in an Exchange Act annual report and the interim home country materials furnished in English under cover of Form 6-K.
Finally, an equity securities issuer will automatically have the Rule 12g3-2(b) exemption immediately upon deregistration under Rule 12h-6, rather than having to wait 18 months as is currently required. As a condition to maintaining that exemption, an issuer must publish in English material home country documents required by Rule 12g3-2(b) on its Internet web site or an electronic information delivery system in its primary trading market. Thus, the rule amendments should make it much easier for investors to gain access to material information about a foreign company once it exits our reporting system. This provision will benefit U.S. investors who seek to continue to invest in the securities of a former Exchange Act reporting foreign company by helping to assure that material information about the company and its securities is available in English and readily accessible. Similarly, the rule amendments also permit a non-reporting company that obtains the Rule 12g3-2(b) exemption by application to the Commission, and not pursuant to Rule 12h-6, to publish electronically its ongoing home country documents required under Rule 12g3-2(b).
The rules would become effective 60 days from their publication in the Federal Register. We are now ready to take your questions.