DAVIS POLK & WARDWELL
December 13, 2002
Mr. Jonathan G. Katz
Dear Mr. Katz:
Davis Polk & Wardwell is an international law firm that represents over 50 foreign private issuers with respect to their capital markets activities in the United States. Based on our experience in representing foreign private issuers, we offer the following observations on certain aspects of the Proposed Rule as it applies to foreign private issuers. We generally support the approach that the Securities and Exchange Commission ("Commission") has taken with respect to foreign private issuers but would like to suggest some clarifications.
Comment 1 - Foreign private issuers should be required to reconcile only to home country GAAP
In general terms, proposed Regulation G and Item 10 of Regulation S-K would require foreign private issuers that disclose or release any non-GAAP financial measure to accompany that non-GAAP financial measure with (a) a presentation of the most comparable GAAP financial measure ("Presentation"), and (b) a reconciliation of the differences between the non-GAAP financial measure disclosed or released with the most comparable GAAP financial measure ("Reconciliation"). We believe that, as applied to foreign private issuers whose primary financial statements are prepared in accordance with non-U.S. GAAP, proposed Regulation G and Item 10 of Regulation S-K, as currently drafted, could be interpreted to require a Presentation based on, and a Reconciliation in accordance with, each of U.S. GAAP and the applicable non-U.S. GAAP.
Regulation G and Item 10 of Regulation S-K of the Proposed Rule define GAAP as "generally accepted accounting principles in the United States, except that in the case of foreign private issuers whose primary financial statements are prepared in accordance with other generally accepted accounting principles, references to GAAP also include the principles under which those primary financial statements are prepared." (emphasis added). The use of the word also in the proposed definition could effectively define GAAP for affected foreign private issuers as both U.S. GAAP and the relevant home country GAAP with the result that a Presentation and Reconciliation is required in accordance with each.
To require Presentation and Reconciliation in accordance with each of U.S. GAAP and home country GAAP is not in line with the overall reporting regime applicable to foreign private issuers, which permits the presentation of financial information in accordance with home country GAAP except in limited circumstances: namely, the Annual Report on Form 20-F and Securities Act registration statements made effective more than nine months after the fiscal year end must include a reconciliation to U.S. GAAP in the footnotes to the financial statements and the selected financial information, together with commentary in the Management's Discussion & Analysis on significant U.S. GAAP differences. The Proposed Rule would significantly expand the circumstances in which a reconciliation to U.S. GAAP would be required, but only in those cases where a foreign private issuer chooses to present a non-GAAP measure. While we support the requirement to require reconciliation of non-GAAP measures to home country GAAP, we do not believe that the policy underlying the Proposed Rule is advanced by the expansion of the U.S. GAAP reconciliation requirement beyond its current borders to any occurrence of a non-GAAP measure.
Where the primary financial statements are prepared in accordance with home country GAAP, we submit that a Presentation and Reconciliation of any non-GAAP financial measure in accordance with home country GAAP is sufficient to achieve the policy purposes of the Proposed Rule.
We attach as Annex A the proposed modification to the definition of GAAP.
Comment 2 - Non-GAAP measures should not be prohibited in Annual Reports on Form 20-F if they are permitted by home country laws and regulations
Proposed paragraph (e)(1)(ii) of Item 10 of Regulation S-K prohibits a foreign private issuer from using certain non-GAAP measures or presenting them in certain manners in its Annual Report on Form 20-F. The instruction to paragraph (e) grants a limited exception to foreign private issuers if the non-GAAP measures are used in the home country disclosure document and are expressly permitted under the GAAP used in the issuer's primary financial statements.
We support this exception and its recognition of the primary role to be played by home country regulators and GAAP. We note that a number of countries are considering the regulation of non-GAAP measures and believe it is appropriate that regulation of non-GAAP measures be promulgated, in the first instance, by the home country regulator who has the greatest familiarity with the economic context of the foreign private issuer. See International Organization of Securities Commissions ("IOSCO"), "Cautionary Statement Regarding Non-GAAP Results Measures", Release by the Technical Committee, May 19, 2002, accessible at www.iosco.org.
As currently worded, however, the exception is not workable. More specifically, we believe it is inaccurate to speak of any non-GAAP measure as being "expressly permitted under the GAAP" used by the foreign private issuer. The function of GAAP is to set forth a set of standardized accounting rules. As such, GAAP itself does not permit or prohibit one or more non-GAAP measures. We are not aware that U.S. GAAP expressly permits any particular non-GAAP measure; indeed, if U.S. GAAP expressly permitted a particular accounting measure, that measure would thereby necessarily comply with U.S. GAAP and therefore not be a non-GAAP measure.
A better rule would be one which turned on whether the particular non-GAAP measure is permitted by the laws and regulations of the foreign private issuer's home country. We also think that the use of a particular non-GAAP measure should not be required to be "expressly" permitted. Laws and regulations rarely present an express list of permitted acts but more usually permit acts which are not prohibited (or expressly require certain acts). It would be a daunting, if not impossible, task for any regulator to exhaustively set forth the full range of disclosure items that are permitted under its securities laws.
An unduly restrictive exception could result in forcing foreign private issuers to delete from their Annual Reports on Form 20-F various types of non-GAAP financial measures routinely included in the home country annual reports available to their non-U.S. investors. We believe that this might result in depriving U.S. investors of useful information considered by management to be relevant for all investors.
We attach as Annex B a proposed modification to Item 10 of Regulation S-K of the Proposed Rule to address these concerns.
Comment 3 - The concept of "outside the United States" in the foreign private issuer exception should be changed to one of "not primarily targeted" to the United States
We support the principle of an exception to Regulation G for foreign private issuers which takes account of the fact that in releasing interim results foreign private issuers are primarily communicating to home country and international investors and that the vast majority of foreign private issuers have their primary trading market outside the United States with U.S. trading activity often accounting for only a very small percentage of total trading volume. Such an exception is in line with the principle of home country deference for interim reporting.
Deference to Home Country Regulators is the Best Route. In our view, the better course would be for the Commission not to directly regulate this area but to work through IOSCO, the members of which are already considering regulation in this area. We support the near universal trend towards tighter regulation of non-GAAP financial measures which are susceptible to abuse but we also believe that non-GAAP financial measures when appropriately used can enhance the information available to investors. We believe that home country regulators, especially those who have signed the IOSCO statement, are in the best position to regulate non-GAAP measures.
Alternatively, the Language needs Changes to be Workable. If the Commission cannot defer to home country regulators, we wish to raise our serious concerns as to whether the language of the proposed exception would in fact achieve what it is intended to achieve and express our belief that as presently drafted, it cannot be applied with certainty by foreign private issuers. The Proposed Rule would provide foreign private issuers with an exception to Regulation G in circumstances where (a) their securities are listed or quoted on a securities exchange or inter-dealer quotation system outside the United States, (b) the non-GAAP financial measure and the most comparable GAAP financial measure are not calculated and presented in accordance with U.S. GAAP, and (c) the disclosure is made by or on behalf of the foreign private issuer outside the United States or is included in a written communication that is released by or on behalf of the foreign private issuer only outside the United States.
Pursuant to Note 2 to proposed section § 244.100, this exception applies notwithstanding that:
(i) Foreign or U.S. journalists or other third parties have access to the information, so long as the information is disclosed or released by or on behalf of the issuer only outside the United States;
(ii) Following its release or disclosure, the information appears on one or more web sites maintained by the issuer, so long as the web sites, taken together, are not available exclusively to, or targeted at, persons located in the United States; and/or
(iii) Following the disclosure or release of information outside the United States, the information is included in a submission by the issuer to the Commission made under cover of a Form 6-K.
We believe the Proposed Rule is unworkable in its current form. In particular, two aspects of the language: the concept of "outside the United States" and the use of the word "following" with respect to websites need to be clarified so that the Proposed Rule can be applied with certainty by foreign private issuers and so that it takes account of how information is disseminated in global markets today. As presently drafted, and with the permission to include U.S. journalists, the Proposed Rule encourages a distinction - inappropriate in the context of financial reporting - between the numerous direct and indirect forms of dissemination used by foreign private issuers today. In addition, the concept itself of releasing information outside of any particular geographic location is outdated and unworkable in today's world of instantaneous global communication through the internet and other technology, which makes information readily available globally without regard to the location of its original source.
Direct and Indirect Communication for Earnings Releases. The logical starting point is an appreciation of how foreign private issuers typically release their earnings information. Foreign private issuers, like U.S. companies, use a variety of direct and indirect mechanisms to release their interim and yearly earnings data to their investors, the financial press and other interested parties. In our experience, upon issuance of an earnings release, the typical foreign private issuer contemporaneously releases the data to its home country regulator, posts the data on its website and releases the data, either directly or indirectly, to home country, international and U.S. press and investors. Often, a foreign private issuer sends e-mails or faxes directly to U.S. and international press or investors or other interested parties. Most easily, this is achieved through mass e-mailings in accordance with a pre-established investor or corporate distribution list. Many corporate websites, both U.S. and foreign, allow any person or entity, wherever based, to request inclusion on the mailing list. We also understand from some of our clients that upon request the data will often be sent to callers on an ad hoc basis. In contrast to direct dissemination, some foreign private issuers use the services of third party providers (U.S. and/or non-U.S. based) to release their earnings data to investors or financial press, particularly those based outside of the home country. Such service providers may disseminate the information to the financial press and/or investors by any of the technical means possible and available today, such as by internet postings, e-mails or faxes. Further, some foreign private issuers disseminate in accordance with home country requirements, such as by transmitting the information directly to an authorized network information system or service which in turn disseminates to, inter alia, international news agencies, or makes the information available to the system subscribers which will include the major domestic and international news agencies.
The same morning of release, foreign private issuers will often hold a press conference, attended by U.S. and non-U.S. journalists, and later in the day host an analyst conference call that is open to U.S. and non-U.S. analysts and others around the world.
The above is not an exhaustive review of the mechanisms used by foreign private issuers to release their earnings data; suffice to say that ultimately, all of these direct and indirect mechanisms - including e-mails, webcasts, conference calls, investor meetings, company website posting, third party service web postings or even faxes - are simply tools for communication and the decision to use one tool over another usually depends upon what is most convenient and appropriate for the individual foreign private issuer. Indeed, some foreign private issuers will use one method for communication in their home country and another method for international communication, including communication to those based in the United States. Critically, all of these U.S. based persons and entities will have access to the information in any event. For example, members of the U.S. press will pick up the information through their attendance at the same morning press conference, their foreign bureaus, the company website postings or via the local or international press, and in turn will disseminate it within the United States but with delayed - unnecessarily and potentially disadvantageously - access to the information by U.S. investors and others.
Against this background of numerous and varied mechanisms for communication, we believe the Proposed Rule inappropriately distinguishes between direct and indirect means of communication. Specifically, by introducing the territorial concept of outside the United States as a criterion for the availability of the Regulation G exception, it throws into doubt the availability of the Regulation G exception in relation to the use of many of the aforementioned methods of communicating directly to investors, financial press and interested persons located in the United States. We strongly submit, in the absence of clarification, that the distinction between direct and indirect mechanisms is inappropriate in the context of interim reporting where interested U.S. parties will and should have access to the information in any event. We also believe that policing the distinctions set up by the Proposed Rule for every interim release would be a logistical nightmare for foreign private issuers and would require substantial changes in their current practices.
The Proposed Rule does not work with NYSE Rules. In addition, the exception would not to be available to foreign private issuers in circumstances where they are required by New York Stock Exchange ("NYSE") rules to immediately release the data into the United States. The NYSE rules require annual and quarterly earnings, amongst other information, to be handled on an "immediate release basis". This requires release by the fastest available means, which ordinarily requires release to the public press by telephone, fax or hand delivery. The NYSE rules go on to state, in relevant part:
"To insure adequate coverage, releases requiring immediate publicity should be given to Dow Jones & Company, Inc., Reuters Economic Services and Bloomberg Business News. Companies are also encouraged to promptly distribute their release to Associated Press and United Press International as well as to newspapers in New York City and in cities where the company is headquartered or has plants or other major facilities. A copy of any press release which may significantly impact on trading should also be sent promptly to the attention of the company's Exchange representative, by facsimile."
As such, foreign private issuers are not in a position to choose to make or release only outside of the United States, and thus the Proposed Rule would effectively impose an interim GAAP Reconciliation and Presentation requirement.
Rule 135e is not the Right Benchmark. We realize that the Staff of the Commission was modeling the Regulation G exception on the off-shore press conference Rule 135e. We do not believe, however, that Rule 135e is the appropriate benchmark for interim earnings releases.
Rule 135e is concerned with offerings and offshore press activities, and involves the concept of "blocking" information and press releases about the offering from being sent directly by the foreign private issuer to U.S. retail investors. Rule 135e under the Securities Act of 1933, as amended, was adopted to facilitate the access of U.S. press to offshore press activities of foreign private issuers on the basis that the continued exclusion of the U.S. press in practice was both anti-competitive and potentially disadvantageous to U.S. investors by delaying their access to information made immediately available to investors offshore.
Rule 135e which deals with offerings does not go far enough to facilitate equal access to information in the interim reporting context. It need hardly be said that acceptance of the Internet and means of communication and access to it have advanced substantially since Rule 135e was proposed in 1996 and passed in 1997. Moreover, it is one thing to establish controls for the less regular event of an offering but quite another thing to establish or require them for each regular interim report. In today's world of global communications, it does not make sense to import the blocking concepts designed to address concerns regarding Section 5 of the Securities Act of 1933 in an offering context into the periodic reporting context under the Securities Exchange Act of 1934. Very different policy concerns are at stake in the two different contexts and in the context of interim reporting, the ability of U.S. investors and other interested U.S. parties to receive the same information at the same time as other investors must be the primary concern.
Not Primarily Targeting is a Better Concept. We believe that the appropriate focus for the interim reporting context lies in the concept of targeting. We submit that the concept of releasing outside the United States as contained in proposed Regulation G should be clarified to provide that this territorial requirement is satisfied if foreign private issuers' communications of any particular information, taken together, do not primarily target persons located in the United States.
Some care must be taken with the use of the word "target", however, as this would be the Commission's first use of the targeting concept in a non-offering context. In connection with the internet, and cross-border internet offers specifically, an Internet Task Force established by the Technical Committee at IOSCO described offers that were "targeted or directed at [U.S.] residents" as offers which were "pushed" at a resident in a particular jurisdiction. The term was not defined in the Commission's 1998 Internet release implementing the IOSCO principles. As drawn from the history of its use by IOSCO and the Commission in the offering context, the word target could therefore be understood to mean information pushed at investors in a particular jurisdiction. Yet, in an interim release context, this is precisely the case - the information is intentionally pushed to investors in each jurisdiction. Accordingly, we have deliberately chosen the concept of primarily targeting to distinguish this concept of targeting in the interim release context from the offering context. We suggest a parallel clarification for Note 2(ii) to § 244.100, which looks at whether the web sites of the issuer, taken together, are available exclusively to or targeted at persons in the United States. Thus U.S. investors receive information as part of a global communications release that it not aimed solely at U.S. investors.
"Following". As alluded to earlier, the release of earnings data by foreign private issuers is typically accompanied by a near instantaneous posting of the data on the issuer's website. We do not believe that the Staff of the Commission meant, by its use of the word "following" in Regulation G's express recognition that near instantaneous web site postings would not destroy the availability of the exception, to condition the exception upon the passage of time and thereby disadvantage U.S. investors by delaying the release of information to them or by requiring the types of "blocking" arrangements by which Rule 135e press releases are prevented from directly going into the United States. Accordingly, we would submit that in this instance, the reference to "following" be deleted.
We attach as Annex C the proposed modification to Regulation G of the Proposed Rule, which clarifies that as long as the information released or disclosed, taken together, is not primarily targeted at persons located in the United States, the foreign private issuer exception applies.
We hope that the foregoing is helpful to you as you consider the Proposed Rule. Please do not hesitate to contact Margaret E. Tahyar at 011-33-1-56-59-36-70 in Paris or Nick Kronfeld at 212-450-4950 in New York if you would like to discuss these matters further.
 In today's post Regulation FD world, these calls are often open to anyone.
 Rule 202.06 of the NYSE Listed Company Manual - "Procedure for Public Release of Information".
 The Commission's proposing release states that this "limited exception ... is similar to that provided by Rule 135e under the Securities Act of 1933 for offshore press and related activities": Commission Release Nos. 33-8145, 34-46768; File No. S7-43-02.
 IOSCO, "Securities Activity on the Internet", Report by the Technical Committee, September, 1998 at page 24, accessible at www.iosco.org.
 "Interpretation: Re: Use of Internet Web Sites to Offer Securities, Solicit Securities Transactions, or Advertise Investment Services Offshore", Commission Release Nos. 33-7516, 34-39779, IA-1710, IC-23071, March 23, 1998. The Commission considered "targeted" in the offering context and held that issuers that implemented precautionary measures reasonably designed to guard against sales to persons in the United States would not be regarded as targeting their offers to persons in the United States.
 In contrast, the furnishing of Form 6-K to the Commission does occur at a later date and thus the use of "following" in Regulation G's express recognition that the furnishing of a Form 6-K will not destroy the availability of the exception makes sense.
We suggest that the definition of "GAAP" as it appears in proposed Regulation G and Item 10 of Regulation S-K of the Proposed Rule be modified as follows (modifications in bold and italics):
§ 244.101 Definitions.
This section defines certain terms as used in Regulation G (§§ 244.100 - 244.102).
(b) GAAP GAAP refers to generally accepted accounting principles in the United States, except that in the case of foreign private issuers whose primary financial statements are prepared in accordance with other generally accepted accounting principles, references to GAAP refers to the principles under which those primary financial statements are prepared.
Item 10 of Regulation S-K
§ 229.10 (Item 10) General.
(e) Use of non-GAAP financial measures in Commission filings.
(3) For purposes of this paragraph (e), "GAAP" refers to generally accepted accounting principles in the United States, except that in the case of foreign private issuers whose primary financial statements are prepared in accordance with other generally accepted accounting principles, references to GAAP refers to the principles under which those primary financial statements are prepared.
We suggest that the proposed exception for foreign private issuers in Item 10 of Regulation S-K of the Proposed Rule be modified as follows (modifications in bold and italics):
Instruction to paragraph (e). A non-GAAP financial measure that would otherwise be prohibited by paragraph (e)(1)(ii) of this section is permitted in a filing of a foreign private issuer if:
We suggest that the provisions in proposed Regulation G of the Proposed Rule be modified as follows (modifications in bold and italics):
Notes to § 244.100
2. The provisions of paragraph (c) of this section shall apply notwithstanding the existence of one or all of the following circumstances:
(i) Foreign or U.S. journalists or other third parties have access to the information, so long as the information is disclosed or released by or on behalf of the registrant only outside the United States;
(ii) The information appears on one or more web sites maintained by the registrant, so long as the web sites, take together, are not available exclusively to, and do not primarily target, persons located in the United States, and/or
(iii) Following the disclosure or release of the information outside the United States, the information is included in a submission by the registrant to the Commission made under cover of a Form 6-K.
3. For the purposes of § 244.100(c)(3) and Note 2(i) to § 244.100, disclosure will be deemed to be made outside of the United States and a written communication will be deemed to be released outside of the United States in circumstances where the registrant's communications through whatever means and taken together, do not primarily target persons located in the United States.