SEC votes to propose all electronic disclosure for foreign firms

Source: Securities and Exchange Commission

Today the Securities and Exchange Commission unanimously voted to propose amendments to modernize its disclosure requirements for foreign companies, including eliminating all requirements for paper submissions.

Many of the proposed SEC rule changes are designed to update the Commission's rules, reflect advancements in technology, and respond to the increasing globalization of the capital markets

"The proposed amendments would bring our foreign company disclosure requirements into the 21st Century by eliminating any requirement for paper, and by giving investors instant access to foreign company disclosure documents electronically, in English, on the Internet," said SEC Chairman Christopher Cox.

John White, Director of the Commission's Division of Corporation Finance, said, "Some of today's rule proposals should be viewed as the latest in a series of recent Commission initiatives to modernize our Exchange Act rules in the wake of the ongoing globalization of securities markets. Others are the result of the Commission's continuous assessment of its disclosure and other requirements for all registered companies, including registered foreign private issuers, to determine whether they should be revised in light of market developments, new technologies, or other matters. All of the proposals would serve the best interests of investors without, we believe, unduly burdening foreign private issuers."

Conrad Hewitt, the Commission's Chief Accountant, said, "As demonstrated by these proposals and other recent action taken by the Commission, the Commission continues to balance the information needs of investors with providing the opportunity for U.S. investors to invest in foreign securities in our markets. I look forward to receiving public input during the comment period."

One set of proposals, known as the Foreign Issuer Reporting Enhancements, would update Exchange Act filing requirements and enhance disclosure required by foreign private issuers in response to changes in foreign filing requirements, market practices, and other areas of the Commission's regulation. Another proposal would amend Exchange Act Rule 12g3-2(b), which exempts a foreign private issuer from having to register a class of equity securities under Section 12(g) of the Exchange Act based on the submission to the Commission of certain information published outside the United States, in order to reflect advances in technology and other recent global changes.

Comments on these proposals should be received by the Commission no later than 60 days after publication in the Federal Register.

The full text of the detailed releases concerning these proposals will be posted to the SEC Web site as soon as possible.

Foreign Issuer Reporting Enhancements Proposals

The principal reporting enhancement proposals are as follows:
  • permit reporting foreign issuers to assess their eligibility to use the special forms and rules available to foreign private issuers once a year on the last business day of their second fiscal quarter, rather than on a continuous basis, which is currently required;
  • 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 large accelerated filers and accelerated filers, and to 120 days after the issuer's fiscal year-end for all other issuers, after a two-year transition period;
  • amend Form 20-F by eliminating an instruction to Item 17 of that Form that permits certain foreign private issuers to omit segment data from their U.S. GAAP financial statements; and
  • amend Exchange Act Rule 13e-3, which pertains to going private transactions by reporting issuers or their affiliates, to reference the recently adopted deregistration and termination of reporting rules applicable to foreign private issuers.

In addition, the Commission voted to solicit public comment on other possible amendments that would affect foreign private issuers. These matters include the following:
  • amend Form 20-F to require disclosure in annual reports filed on that Form about: any changes in and disagreements with the registrant's certifying accountant; the fees, payments and other charges relating to American Depositary Receipts; certain corporate governance matters; and information about highly significant, completed acquisitions; and
  • eliminate the availability of the limited U.S. GAAP reconciliation option that is contained in Item 17 of Form 20-F for foreign private issuer registrants.

Rule 12g3-2(b) Proposal

The Rule 12g3-2(b) exemption permits a foreign private issuer to exceed the shareholder thresholds for registration under Exchange Act 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 Rule 12g3-2(b) exemption, a non-reporting issuer must initially submit written materials to the Commission in paper, including a list of the issuer's non-U.S. disclosure obligations, information concerning its U.S. shareholders, and paper copies of its non-U.S. disclosure documents published since the beginning of its most recently completed fiscal year. The proposed amendments would eliminate the paper submission requirements by automatically granting the Rule 12g3-2(b) exemption to a foreign private issuer that meets specified conditions, which do not depend on a count of an issuer's U.S. security holders, and which would require an issuer to publish electronically in English specified non-U.S. disclosure documents. 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-U.S. disclosure documents and make better informed decisions regarding whether to invest in that issuer's equity securities.

As proposed, in order to be eligible to claim the Rule 12g3-2(b) exemption
  • an issuer must not have any Exchange Act reporting obligations under Section 13(a) or 15(d) of the Exchange Act;
  • an issuer must maintain a listing of the subject securities on one or more exchanges in one or two foreign jurisdictions comprising its primary trading market;
  • the U.S. trading volume for the subject securities must be no greater than 20 percent of its worldwide trading volume for its most recently completed fiscal year, or the issuer must be claiming the Rule 12g3-2(b) exemption in connection with its deregistration under Exchange Act Rule 12h-6; and
  • the issuer must publish specified non-U.S. disclosure documents in English, required since the beginning of its most recently completed fiscal year, on its Internet web site or through an electronic information delivery system that is generally available to the public in its primary trading market, unless claiming the exemption in connection with or recently following its deregistration.

As proposed, in order to maintain the Rule 12g3-2(b) exemption
  • an issuer must electronically publish specified non-U.S. disclosure documents in English for subsequent fiscal years on an ongoing basis;
  • continue to maintain its foreign listing;
  • continue to meet the trading volume threshold for its most recently completed year other than the year in which it first claims the exemption; and
  • does not otherwise incur any Exchange Act reporting obligations.

The rule proposal would establish a three-year transition period to accommodate a currently exempt issuer that could 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 Exchange Act Section 12, if it could not qualify for the amended exemption, no later than three years from the effective date of the rule amendments. This transition period would grant affected issuers sufficient time to prepare for and complete the Section 12 registration process.

The rule proposal would also establish a three-month transition period following the rule's effectiveness, during which Commission staff would continue to process paper submissions under Rule 12g3-2(b), in order to provide issuers with sufficient time to develop their electronic publishing capabilities and investors to determine how best to access the electronic publications of Rule 12g3-2(b)-exempt companies. Following the three-month period, the Commission would no longer process paper submissions under Rule 12g3-2(b).

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