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SEC Staff: Are Differences for FPIs Still Justified?

Tammy Whitehouse | March 16, 2012

As the world awaits word from the Securities and Exchange Commission on whether, when, and how the United States will adopt international accounting standards, SEC staff is wondering if it is time to consider changes in reporting requirements for foreign companies listed on U.S. exchanges. A large percentage of the nearly 1,000 foreign private issuers regulated by the SEC are not listed in a regulated trading market in another country, causing SEC staff to wonder if they should be allowed to report under different rules from U.S.-based companies.

Meredith Cross, director in the SEC's Division of Corporation Finance, said in a speech to a London securities regulation conference that the staff has taken note of a significant shift in the demographics of foreign private issuers listed on U.S. exchanges, leading staff to wonder if the current reporting regime is appropriate. Not long ago, the typical foreign private issuer was a large-cap, FT Global 500 company listed in its home country with a secondary listing in the United States. “Many of these companies were from the United Kingdom, and it was a well-worn path,” she said.

The SEC developed its current reporting requirements based on an understanding that most FPIs were subject to a home-country regulator in addition the SEC, Cross said. That includes the 2007 decision to allow foreign private issuers to file financial statements prepared under International Financial Reporting Standards without reconciling them to U.S. Generally Accepted Accounting Standards. “This regime made great sense when established,” she said. “The United States did not need to drive periodic disclosure for U.S.-listed foreign companies. The home country regulator was focused on that.”

While the number of FPIs has held steady at around 1,000 companies for “quite some time,” Cross said, the staff has noticed a “major change” in the percentage of offshore companies that are listed only in the United States. “It has always been the case that there were some foreign companies that were only listed in the United States, but now we see large numbers of foreign companies whose only trading market is the New York Stock Exchange or Nasdaq,” she said. It's causing the staff to wonder if the current reporting model is right.

“Should companies that are only listed in the United States – whose only price discovery market is an exchange in the United States, who have a significant shareholder base in the United States, and who have no applicable home country disclosure requirements – be subject to a reporting model that is different than a U.S. company?” she said. “Should these companies not be required to provide quarterly financial information and 8-K level current reporting? Should any of these questions apply to foreign private issuers that are also listed on a foreign exchange?”

Cross offered no further news on an SEC decision to adopt IFRS. She said the staff is preparing its final report to the Commission, which should be published in “a few months.”