Speech by SEC Staff:
Opening Remarks before the Commission Open Meeting
Elliot B. Staffin, Special Counsel, and Felicia H. Kung, Senior Special Counsel
Office of International Corporation Finance, Division of Corporation Finance
U.S. Securities and Exchange Commission
February 13, 2008
Opening Remarks of Elliot Staffin
Thank you, John, Chairman, Commissioners. We recommend that the Commission propose to amend Exchange Act Rule 12g3-2(b), which provides an exemption from registration under Exchange Act Section 12(g) for equity securities of a foreign private issuer based on the submission to the Commission of information that the issuer has published or is required to publish pursuant to the laws of its home jurisdiction, the rules of its non-U.S. securities exchange, or that it has distributed to its security holders. The exemption allows a foreign private issuer to exceed the registration thresholds of Section 12(g) and effectively have its equity securities traded on a limited basis in the over-the-counter market in the United States. Currently, in order to obtain the exemption under Exchange Act Rule 12g3-2(b), a non-reporting foreign private issuer must submit written materials to the Commission in paper, which must include information concerning its non-U.S. disclosure requirements and its United States security holders, along with paper copies of its non-U.S. disclosure documents for its last fiscal year. Under the current rule, an issuer may also submit to the Commission paper copies of its non-U.S. disclosure documents that are required on an ongoing basis in order to maintain the exemption.
The proposed amendments would eliminate the paper submission requirements by enabling a foreign private issuer to claim the Rule 12g3-2(b) exemption as long as it meets the following conditions. First, regardless of the number of its U.S. holders, an issuer would be eligible to claim the exemption if the average daily trading volume of the subject class of securities in the United States has been no greater than 20 percent of the average daily trading volume of that class on a worldwide basis for the issuer's most recently completed fiscal year. The Commission adopted a trading volume standard last year as part of the foreign deregistration amendments because of its belief that a trading volume standard is a more direct and less costly measure of the relative U.S. market interest in a foreign private issuer's securities than one based on a count of the issuer's shareholders. We believe the same considerations apply to a determination of when a foreign private issuer must register a class of securities under Section 12(g). If only 20 percent or less of an issuer's worldwide trading volume occurs in the United States, we believe the relative U.S. market interest in those securities does not warrant subjecting the issuer to Exchange Act reporting requirements.
A second proposed condition of Rule 12g3-2(b) is that the issuer must currently maintain a listing of the subject class of securities on one or more foreign exchanges in one or two jurisdictions constituting its primary trading market. The proposed rule defines primary trading market to mean that at least 55 percent of the trading in the issuer's securities took place in, on or through the facilities of a securities market or markets in no more than two foreign jurisdictions during the issuer's most recently completed fiscal year. This proposal is substantially similar to the foreign listing condition and definition of primary trading market adopted as part of the foreign deregistration rule amendments.
The purpose of the foreign listing condition is to help assure that there is a non-U.S. jurisdiction that principally regulates and oversees the issuance and trading of the issuer's securities and the issuer's disclosure obligations to investors. This foreign listing condition makes more likely the availability of a set of non-U.S. securities disclosure documents to which a U.S. investor may turn for material information when making investment decisions about the issuer's securities. This foreign listing condition is also consistent with Commission staff's past and current practice of administering the Rule 12g3-2(b) exemption.
Third, in order to claim the Rule 12g3-2(b) exemption, unless in connection with or following a recent Exchange Act deregistration, the proposed amendments would require an issuer to have published in English, on its Internet Web site or through an electronic information delivery system generally available to the public in its primary trading market, specified non-U.S. disclosure documents published since the beginning of its most recently completed fiscal year. An issuer would also have to publish electronically these specified non-U.S. disclosure documents in English on an ongoing basis for subsequent fiscal years in order to maintain the exemption. As a result, the proposed amendments should make it easier for U.S. investors to gain access to a foreign private issuer's material non-United States disclosure documents and make better informed decisions regarding whether to invest in that issuer's equity securities in the U.S. over-the-counter market or otherwise.
Fourth, as proposed, Exchange Act Rule 12g3-2(b) would require a foreign private issuer not to have any reporting obligations under Exchange Act Section 13(a) or 15(d). Like the current non-Exchange Act reporting condition of Rule 12g3-2(b), the purpose of this provision is to prevent an issuer from claiming the Rule 12g3-2(b) exemption when it already has incurred active Exchange Act reporting obligations. However, unlike the current rule, the proposed rule would not require an issuer to look back 18 months and determine whether it had any active or suspended reporting obligations during that period. Elimination of a lengthy waiting period would help hasten the electronic publishing of a foreign private issuer's non-U.S. disclosure documents to the benefit of investors.
As under the current rule, an issuer would lose the Rule 12g3-2(b) exemption if it incurred Exchange Act reporting obligations or if it ceased publishing electronically its non-U.S. disclosure documents. However, unlike under the current rule, an issuer would also lose the exemption under the proposed amendments if it no longer was listed on an exchange in its primary trading market. We believe this provision is necessary in order to help ensure the continued availability of a set of non-U.S. disclosure documents to which investors may turn when making decisions regarding an issuer's securities.
In addition, under the proposed rule amendments, an issuer would have to determine at the end of each fiscal year, other than the year in which it first claims the exemption, whether it still meets the trading volume standard, even if the issuer was in compliance with the non-U.S. disclosure publication requirements. Currently a
Rule 12g3-2(b)-exempt company that is current in its non-U.S. disclosure obligations does not have to assess at the end of each fiscal year whether it has exceeded the record holder thresholds under Section 12(g). We believe this differing treatment is warranted because trading volume information is more easily obtainable than information regarding a foreign private issuer's U.S. and worldwide shareholders. Moreover, the trading volume standard provides a more direct measure of relative U.S. investor interest in an issuer's securities. An issuer would not have to make the trading volume determination for the fiscal year in which the issuer first claimed the exemption, however, in order to provide a reasonably long enough period to assess relative U.S. market interest for the issuer's securities.
Finally, we recommend establishing a three-year transition period to accommodate a currently exempt issuer that would lose the exemption upon the effective date of the revised rule because it did not satisfy the trading volume threshold. That issuer would have to register under Section 12, if it could not qualify for the amended exemption, no later than 3 years from the effective date of the rule amendments. We believe this transition period would grant affected issuers sufficient time to prepare for and complete the Section 12 registration process.
We also recommend establishing a three-month transition period following the effectiveness of the amendments to permit issuers to comply fully with the electronic publishing requirement and investors to determine how best to access those electronically published documents. During this three-month period, the Commission would continue to process paper documents submitted under Rule 12g3-2(b) and make them available for public inspection at our Washington, D.C. headquarters. But once the three-month period is up, the Commission would no longer process paper documents submitted under the rule.
In conclusion, we believe the proposed rule amendments will benefit investors by increasing their access to a foreign private issuer's non-U.S. disclosure documents while at the same time reducing that issuer's costs of compliance under Rule 12g3-2(b).
Thank you, and now Felicia will present the Foreign Issuer Reporting Enhancements proposal.
Opening Remarks of Felicia Kung
Good morning. The Division of Corporation Finance and the Office of the Chief Accountant recommend that you publish for public comment proposed rule and form amendments that would improve the accessibility of the U.S. markets to foreign private issuers, and enhance the disclosures that these issuers provide to U.S. investors. As Chairman Cox has noted, in regulating foreign private issuers the Commission has sought to balance its dual objectives of eliminating inadvertent barriers to our capital markets, while also promoting investor protection. The proposals that you are considering today continue this nuanced approach.
Our recommendations are as follows. First, we recommend that you publish for public comment amendments that would permit foreign issuers to assess their eligibility to use the special forms and rules available to foreign private issuers once a year, rather than on a continuous basis, which is currently required. To provide greater certainty to both issuers and investors as to the status of these foreign issuers within a given period, we recommend permitting foreign issuers to test their status on the last business day of their second fiscal quarter. This is the same date used to determine accelerated filer status under the Exchange Act and smaller reporting company status under Regulation S-K.
We are also recommending that if a foreign issuer determines that it no longer qualifies as a foreign private issuer on the last business day of its second fiscal quarter, it should be required to comply with the reporting requirements and use the forms prescribed for domestic issuers beginning on the first day of the fiscal year following the determination date. For example, a foreign issuer that did not qualify as a foreign private issuer as of the end of its second fiscal quarter in 2009 would file a Form 10-K in 2010 for its 2009 fiscal year. The issuer would also begin complying with the proxy rules and Section 16, and filing reports on Forms 8-K and 10-Q on the first day of its 2010 fiscal year. This would give such issuers six months' advance notice that they will need to transition to the domestic reporting regime. On the other hand, we recommend permitting a reporting company that qualifies as a foreign private issuer to use the forms and rules available to foreign private issuers beginning on the determination date on which it establishes its eligibility as a foreign private issuer.
Second, we recommend that you publish for public comment proposed amendments to accelerate the reporting deadline for annual reports filed on Form 20-F by foreign private issuers from six months to 90 days after the issuer's fiscal year-end in the case of accelerated and large accelerated filers, and to 120 days after the issuer's fiscal year-end for all other issuers. We believe the time is ripe for these proposals in light of the recently adopted rule amendments that would exempt foreign private issuers from the reconciliation requirement if they prepare their financial statements in accordance with IFRS, as issued by the IASB. We also note the faster timetable in which many foreign private issuers now provide annual reports in their home jurisdictions. If the Commission decides to adopt an accelerated deadline after considering the comments received in response to this proposal, we recommend providing a two-year transition period.
Third, we recommend that you publish for public comment a proposed amendment to Item 17 of Form 20-F that would eliminate an instruction that permits certain foreign private issuers to omit segment data from their U.S. GAAP financial statements, and to have a qualified U.S. GAAP audit report. We believe that an accommodation that permits a foreign private issuer to present incomplete and non-compliant U.S. GAAP financial statements may no longer be necessary or appropriate. This narrow accommodation is currently used by very few foreign private issuers.
We are also recommending that you propose technical amendments to Exchange Act Rule 13e-3, which pertains to going private transactions by reporting issuers or their affiliates. Under the proposal, Rule 13e-3 would be amended to reference the recently adopted deregistration and termination of reporting rules applicable to foreign private issuers.
In addition to these proposals, we recommend that you solicit public comment on other possible amendments to Form 20-F. One proposal relates to the elimination of the limited U.S. GAAP reconciliation option that is contained in Item 17 of Form 20-F. Item 17 is available for foreign private issuers that are only listing a class of securities on a U.S. securities exchange, or only registering a class of equity securities under Section 12(g) of the Exchange Act, and not conducting a public offering. Item 17 is also available for certain non-capital raising transactions, such as offerings pursuant to reinvestment plans, offerings upon the conversion of securities, or offerings of investment grade securities. We recommend that you solicit comment on a proposal to eliminate this limited reconciliation option. This would eliminate the distinction between the disclosure provided to the primary and secondary markets, and also ensure that the same type of financial information is provided regardless of the type of offering that is being made. As a result of the proposal, all foreign private issuers that are required to provide a U.S. GAAP reconciliation would be required to do so pursuant to Item 18 of Form 20-F, although required third-party financial statements could continue to be prepared pursuant to Item 17. If the Commission decides to adopt this proposal after considering the public comments, we recommend establishing a compliance date that would provide foreign private issuers with sufficient time to transition to the Item 18 requirements when preparing their financial statements.
We also recommend that you solicit public comment on possible amendments to Form 20-F that would require foreign private issuers to provide certain new disclosures in their annual reports. This would include disclosure about any changes in and disagreements with their certifying accountant; fees, payments and other charges relating to American Depositary Receipts, and disclosures about significant differences in corporate governance practices. Many U.S. securities exchanges exempt listed foreign private issuers from many of their corporate governance requirements, but require these issuers to disclose the significant ways in which their corporate governance practices differ from those followed by domestic companies under the relevant exchange's listing standards. This disclosure can be provided in the issuer's annual report or on its website. We recommend soliciting public comment on possible amendments to require the disclosure of these differences in the Form 20-F annual report. Because foreign private issuers already provide other corporate governance disclosures in their Form 20-F, this would consolidate all of the relevant corporate governance disclosure about a listed company in one central location. Finally, we recommend that you solicit public comment on possible amendments to require foreign private issuers to provide financial information in their annual reports for completed acquisitions that are significant at the 50% or greater level, measured according to Rule 1-02(w) of Regulation S-X.
Thank you. We would be happy to answer any questions you may have.