The Securities and Exchange Commission may have spent most of its time last week mapping out a schedule to adopt International Financial Reporting Standards, but it did also vote to
update and modernize the disclosure requirements for foreign issuers offering securities in U.S. markets.
The rules adopted Aug. 27 mean foreign reporting companies will be required, after a transition period, to file annual reports with the SEC in four months—two months earlier than currently required, but a month later than the 90 days the SEC initially proposed for accelerated filer FPIs.
The SEC expects the changes to give U.S. investors a better, faster way to get financial information about FPIs. The amendments finalize a trio of proposals published earlier this year; most were adopted substantially as proposed.
SEC Chairman Christopher Cox said the updates to the FPI rules will “encourage cross-border capital flows and eliminate needless barriers to our securities markets, so U.S. investors have better information about the securities of foreign companies.”
Other rule changes—dubbed the Foreign Issuer Reporting Enhancements—will allow foreign issuers to test their eligibility to use the FPI forms and rules once a year, rather than continuously; will require disclosures regarding changes in and disagreements with a company’s certifying accountant in annual reports and registration statements; and revise the annual report and registration statement forms used by FPIs.
Also approved were rule amendments related to Exchange Act Rule 12g3-2(b), which provides an exemption from registration under Exchange Act Section 12(g) for equity securities of an FPI based on the submission of certain non-U.S. information. The revised rules scrap a requirement for those companies to submit a written application and paper disclosures to the SEC, and require them to instead publish specified disclosure documents, in English, online.
To claim the 12g3-2(b) exemption, FPIs must 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, defined to mean that at least 55 percent of the trading in the issuer’s securities took place in no more than two foreign jurisdictions during its most recently completed fiscal year. FPIs must also continue to have no reporting obligations under Exchange Act Section 13(a) or 15(d). Unlike the current rule, the amended rule won’t require issuers to look back 18 months and determine whether they had any active or suspended reporting obligations.
To maintain the exemption, FPIs also have to publish the specified disclosure documents electronically in English on an ongoing basis for subsequent fiscal years. The amendments include a three-year transition period to accommodate currently exempt issuers that would lose the exemption upon the effective date of the revised rule.
Notably, the staff dropped a proposal that would have required that the average daily trading volume of an issuer’s class of equity securities in the United States be no greater than 20 percent of the average daily trading volume of that class on a worldwide basis for its most recently completed fiscal year. That was omitted in the final rule in response to concerns that it would discourage foreign issuers from establishing or maintaining sponsored ADR facilities or otherwise engaging in exempted offerings in the United States.
The SEC also approved rule amendments that expand the ability of U.S. investors to participate in cross-border tender offers and other business combinations. The amendments codify existing interpretive positions and exemptive orders and allow specified foreign institutions to report beneficial ownership on Schedule 13G to the same extent as their U.S. institutional counterparts.
The revised rules include changes to the current look-through test for identifying beneficial owners when determining eligibility to rely on the cross-border exemptions; changes to the Tier I and Tier II cross-border exemptions and the elimination of the 20 U.S. business day limit on the maximum length of a subsequent offering period for U.S. and cross-border tender offers.
The SEC will post the full text of the adopting releases as soon as possible, and Compliance Week will then add the documents to its
searchable database of rules and standards.
Related Video: Watch Christopher Cox Speak on FPI (Aug. 27, 2008)
Related Resource: Additional SEC Staff Comments on FPI Proposals Aug. 27, 2008)
Related Coverage: FPIs Balk at New Filing Deadlines (May 20, 2008)
Related Coverage: SEC to Overhaul Foreign Issuers (Feb. 20, 2008)
Related Coverage: FPIs Mostly Favor Rule 12(g) Fixes (April 29, 2008)