Davis Polk & Wardwell Newsflash

SEC Adopts Foreign Issuer Reporting Enhancement Rules and Certain Amendments to Rules Regarding the Rule 12g3-2(b) Exemption for Foreign Private Issuers

August 28, 2008

At an open meeting yesterday morning, the SEC voted to adopt a number of new rules pertaining to reporting enhancements for foreign companies that are SEC registrants. The SEC also voted unanimously to adopt amendments to the current Exchange Act Rule 12g3-2(b) exemption from registration, replacing the paper application process with an automatic exemption, as well as eliminating ongoing paper submissions of disclosure documents to the SEC in favor of a requirement for issuers to post such documents on their websites. Except as noted below, the new rules were adopted largely as proposed. However, given the highly technical nature of the newly adopted rules, we expect that the final adopting releases, which will be published in a few days, will provide important additional details and context about the scope of the rules and the relevant transition periods. We plan to distribute a detailed memorandum once the final rules are made public.

After reviewing the SEC's press release and statements made by the SEC staff and Commissioners at yesterday's open meeting, our view is that the most significant announcements made at the meeting were the following:

Foreign Issuer Reporting Enhancement Rules

  • Accelerated 20-F filing deadline – The deadline for the filing of annual reports on Form 20-F has been shortened from six months to four months from the end of the filer’s fiscal year. This deadline is earlier than many commentators had hoped would be implemented. Based on the meeting and the SEC’s press releases, it does not appear that any exceptions have been made for non-IFRS filers or dual-GAAP filers.
    • The adopting release provides for a three-year transition period, so that the new deadline will apply for fiscal years ending on or after December 15, 2011.
  • Proposed Rule Requiring Disclosure of Financial Information for Significant Completed Acquisitions NOT adopted
    • The SEC had proposed a rule requiring foreign private issuers to provide financial information in their annual reports on Form 20-F for business acquisitions made during the relevant fiscal year. This requirement would have been triggered “at the 50% or greater level.” This rule, which had received a number of adverse comments, was not adopted, and no indication was given as to whether the rule would be proposed again in a modified form.

A number of other changes were also adopted, largely as formulated in the SEC’s proposing release. These rules pertain to the following topics:

  • Disclosure Relating to Changes in Registrant’s Certifying Accountant – The adopting release will require foreign private issuers to report any changes in or disagreements with their certifying accountant in their annual reports on Form 20-F. The extent to which this disclosure will track the US disclosure or be tailored for foreign private issuers’ special circumstances was not discussed during the open meeting.
  • Annual Disclosure about ADR Fees and Payments – The new rules modify Form 20-F to require disclosure of fees and other charges paid in connection with American Depositary Receipt (“ADR”) facilities, including depositaries’ annual fees for general depositary services and payments made from the depositary to the issuer whose securities underlie the ADRs.
  • Annual Foreign Private Issuer Status Determination – Reporting foreign issuers will be able to assess their status as foreign private issuers once per year, rather than on a continuous basis, as is currently required. This revision will provide significant relief to those relatively few foreign private issuers who are affected by it.
    • Reporting foreign issuers will make their foreign private issuer assessment on the last business day of their second fiscal quarter. If, on that date, a foreign issuer determines that it no longer qualifies as a foreign private issuer, it will be required to comply with the rules and use the forms prescribed for domestic companies beginning on the first day of the following fiscal year. This effectively gives a company that previously had foreign private issuer status a six-month grace period before it must begin complying with the rules applicable to domestic issuers.
  • Segment Data Required More Often
    • The adopting release eliminates the accommodation in Item 17 of Form 20-F that allows foreign private issuers who present their financial statements in accordance with US GAAP to omit segment data from financial statements and have a qualified US GAAP audit report.
    • Also eliminated were the provisions which currently allow a foreign private issuer that is only listing a class of securities on a national exchange, or only registering a class of securities under Exchange Act Section 12(g), without conducting a public offering of those securities to provide financial statements according to Item 17, as well as the rules allowing foreign private issuers that are making certain non-capital raising offerings to provide Item 17 financial statements.
    • The adopting release provides for a three-year transition period, such that these rules will become effective for fiscal years beginning after December 15, 2011.
  • Going-Private Transactions – Under current rules, Exchange Act Rule 13e-3 requiring an issuer to file a Schedule 13E-3 disclosing its intention to go private can be triggered by a number of events. The modified rule will specify that this obligation is also triggered when an issuer becomes eligible to deregister as a result of a going-private event.
  • Disclosure About Differences in Corporate Governance Practices – Previously, foreign private issuers whose securities were listed on US exchanges had an option to disclose differences between their home country disclosure either in their Form 20-F or solely on their website. Henceforth, the disclosure must be in the Form 20-F, regardless of whether or not it is posted on the company’s website. This change in the placement of disclosure should not be burdensome to foreign private issuers who can always also place the information on their website if they wish.

Amendments to rules regarding the 12g3-2(b) exemption for foreign private issuers

  • 20% US ADTV Threshold Not Adopted The proposed requirement that a foreign private issuer’s US Average Daily Trading Volume (“ADTV”) be less than 20% of its worldwide ADTV in order to qualify for the exemption is not included in the newly adopted rule. At the open meeting, SEC staff noted that many of the comments they had received registered opposition to the requirement, and that the requirement was not necessary given the regulatory oversight to which issuers will be subject in their primary trading market.
  • English Translation of Specified Documents – Currently, an issuer relying on Rule 12(g)3-2b may submit either English versions or adequate English summaries of press releases and other communications or materials distributed directly to investors, rather than full English translations. A number of commentators had objected to the proposed rule which would have required that all documents be translated in full into English, even those that were of purely home-country significance. In apparent response to the comments, the SEC decided that issuers will be required to prepare full English translations of a list of specific home-country disclosure documents. The list was not disclosed at the open meeting. There were some indications that the specified documents will be limited to the most important documents which are already being translated into English by most companies.
  • Conditions for a Foreign Private Issuer to Claim a 12g3-2(b) Exemption Under the amended rule, a foreign private issuer may claim the Rule 12g3-2(b) exemption automatically without submitting an application to the SEC, so long as the following conditions are met:
    • The issuer is not required to file or furnish reports under Exchange Act Section 13(a) or 15(d). There is no waiting period and an issuer is not required to look back to the previous 18 months to ensure that registration was not required over that time period.
    • The issuer maintains a listing of the subject class of securities on one or more exchanges in a foreign jurisdiction. At least 55% of its worldwide ADTV must take place in no more than two non-US jurisdictions, and the issuer’s US ADTV must be lower than at least one of those jurisdictions.
    • The issuer must have published specified non-US disclosure documents that are required to be made public from the first day of its most recently completed fiscal year, in English, on its website or through an electronic information delivery system generally available to the public in its primary trading market.

As noted above, we plan to distribute a more detailed memorandum once the SEC publishes the adoptive releases. In the meantime, please do not hesitate to call your Davis Polk contact with questions.

See SEC press release describing the adoption of the foreign issuer reporting enhancement rules and the amendments to rules regarding the 12g3-2(b) exemption for foreign private issuers.

Davis Polk & Wardwell