February 19, 2008

SEC VOTES TO PROPOSE ALL-ELECTRONIC DISCLOSURE FILINGS AND UPDATES TO REGISTRATION
REQUIREMENTS FOR FOREIGN PRIVATE ISSUERS

The Securities and Exchange Commission (SEC) has voted at an open meeting to propose amendments to the disclosure requirements for foreign companies and to the test for registration under the Securities Exchange Act of 1934 (Exchange Act) for foreign companies.

At the open meeting on February 13, SEC Chairman Christopher Cox commented that 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.” The SEC has not yet published the proposed rules.

What Changes to the Disclosure Requirements Is the SEC Proposing?

Under what is known as the Foreign Issuer Reporting Enhancements, the SEC is proposing to update Exchange Act filing requirements for foreign private issuers. Probably the most significant proposal is reducing the reporting deadline for annual reports filed on Form 20-F by foreign private issuers from six months after an issuer’s fiscal year to 90 days for large accelerated filers and accelerated filers, and to 120 days for all other issuers.

Other proposals under the Foreign Issuer Reporting Enhancements include:

  • Permitting reporting foreign private issuers to assess their continued foreign private issuer eligibility (for use of special forms and rules) once a year on the last day of their second fiscal quarter, instead of on a continuous basis;
  • Eliminating the instruction to Item 17 of Form 20-F that permits foreign private issuers to omit segment data from their US GAAP financial statements; and
  • Amending Rule 13e-3 under the Exchange Act (the going private transaction rule) to reference the recently adopted deregistration and termination of reporting rules for foreign private issuers.

In addition, the SEC intends to solicit comments on other possible amendments affecting foreign private issuers, such as requiring disclosure in the Form 20-F related to any changes in and disagreements with the foreign private issuer’s accountant; the fees, payments, and other charges related to American Depositary Receipts; certain corporate governance matters; and information regarding significant acquisitions that have been completed. The SEC will also seek comments on eliminating the limited US GAAP reconciliation option available to foreign private issuers that is contained in Item 17 of Form 20-F.

What Proposals Are Being Made to the Registration Requirements?

The SEC is proposing amendments to the exemption from the registration requirements of Section 12(g) of the Exchange Act for the equity securities of foreign private issuers that is contained in Rule 12g3-2(b). The exemption allows foreign private issuers to have their equity securities traded on a limited basis in the US over-the-counter market without being required to register pursuant to Section 12(g) of the Exchange Act.

The intent of the amendments is to give US investors better access to a foreign private issuer’s material non-US disclosure information. In order to obtain the exemption now, a non-reporting foreign private issuer must initially submit written materials to the SEC in paper, including a list and copies of non-US disclosure documents and information about its US shareholders.

The proposal would eliminate the paper filing requirement by automatically granting the exemption in Rule 12g3-2(b) if a non-reporting foreign private issuer meets the following requirements:

  • The issuer must not have any Exchange Act reporting obligations under Sections 13(a) or 15(d);
  • The issuer must maintain a listing of its applicable equity securities on one or more exchanges in one or two foreign jurisdictions comprising its primary trading market;
  • The issuer’s US trading volume for the applicable equity securities must not exceed 20 percent of its worldwide trading volume for its most recently completed fiscal year (or the issuer must be claiming the exemption in connection with its deregistration from the Exchange Act pursuant to recently adopted Rule 12h-6); and
  • The issuer must publish specific non-US disclosure documents in English on its Internet web site or through an electronic information delivery system that is generally available to the public in its primary trading market.

To maintain its exemption pursuant to Rule 12g3-2(b) under these proposals, a foreign private issuer must continue to publish its specified non-US disclosure documents in English, maintain its foreign listing, meet the 20 percent trading volume threshold in each fiscal year, and not otherwise incur any reporting obligations under the Exchange Act. The amendments would have a three-year transition period to allow those foreign private issuers that would lose the exemption as a result of the amendments adequate time to prepare for and complete the Section 12 registration process.

What Can Be Expected for These Proposals?

It remains to be seen if the SEC adopts these amendments in substantially the form they were proposed at its open meeting. In particular, we expect the shortened filing deadlines for annual reports on Form 20-F and the electronic publication of material non-US disclosure documents in English under the Rule 12g3-2(b) exemption to draw comments from such issuers and/or their counsel that these amendments will make it more burdensome for them to comply with their US reporting obligations or have their securities traded in the US without registration under the Exchange Act.