United States: SEC Proposes Foreign Issuer Reporting Enhancements

Originally published 10 March, 2008

Keywords: Securities and Exchange Commission, foreign private issuers, US GAAP, financial statements, segment data disclosure, annual determination date; Form 20-F; Form F-1; Form F-4

The Securities and Exchange Commission has proposed amendments to the rules relating to foreign private issuers. The amendments are intended to improve accessibility to the US public capital markets for these issuers, and to enhance information that is available to investors (Release Nos. 33-8900; 34-57409). Comments are due on or before May 12, 2008.

The principal proposals would:

• Allow foreign issuers to determine if they are qualified to use foreign private issuer forms and rules once a year, rather than continuously;
• Change the deadline for annual reports filed by foreign private issuers;
• Eliminate an option under which foreign private issuers are permitted to omit segment data from their US GAAP financial statements; and
• Amend the rule pertaining to going private transactions to reflect the new termination of reporting and deregistration rules for foreign private issuers.

The Proposing Release also solicits comments on proposed amendments to certain disclosure requirements of the annual report and registration forms used by foreign private issuers.

Annual Determination Date for Foreign Private Issuer Status

The proposed amendments would permit reporting foreign issuers to assess their eligibility to use foreign private issuer forms and rules once a year, on the last business day of their second fiscal quarter, rather than having to make the assessment continuously throughout the year. The proposed amendment also would require Canadian issuers subject to the multijurisdictional disclosure system to test their foreign private issuer status on this same date. Under the proposed amendments, if a foreign issuer determines that it no longer qualifies as a foreign private issuer on the last business day of its second fiscal quarter, it then would be required to comply with the reporting requirements and use the forms and other rules prescribed for domestic companies (i.e., preparing annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and complying with the proxy rules and Section 16 of the Securities Exchange Act of 1934) beginning on the first day of the fiscal year following the determination date. This would give such issuers six months’ advance notice of their transition to the domestic forms and applicable reporting requirements.

When a reporting company qualifies as a foreign private issuer, the proposed amendments specify that the company may avail itself of the foreign private issuer accommodations (including use of the foreign private issuer forms and reporting requirements) beginning on the date on which it determines its eligibility as a foreign private issuer. In this circumstance, starting on the determination date, the foreign private issuer may stop providing current reports on Form 8-K and quarterly reports of Form 10-Q and instead provide reports of foreign issuers on Form 6-K.

Acceleration of the Reporting Deadline

The proposed amendments would 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 accelerated and large accelerated filers, and to 120 days after the issuer’s fiscal year-end for all other issuers. The proposed amendments would not change the age of financial statement requirements for registration statements under the Securities Act or Exchange Act. The Proposing Release states that the SEC expects that if this change is adopted, a two-year transition period would be provided.

Segment Data Disclosure

The proposed amendments would eliminate an option on annual report Form 20-F that currently permits certain foreign private issuers to omit segment data from their US GAAP financial statements. The Proposing Release states that the existing accommodation is inconsistent with recent developments in financial reporting and currently is used by only a small number of foreign private issuers.

Exchange Act Rule 13e-3

The proposed amendments would revise Exchange Act Rule 13e-3, pertaining 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. These deregistration amendments permit foreign private issuers to terminate their reporting obligations under the Exchange Act by meeting a quantitative benchmark designed to measure relative US market interest for their equity securities that does not depend on a head count of the issuers’ US security holders. The proposed amendments would expand the definition of a Rule 13e-3 transaction to specify that a transaction will be subject to the rule if, as a result of the transaction, the issuer becomes eligible to deregister under the Exchange Act in accordance with the deregistration amendments.

Possible Form 20-F Amendments

The Proposing Release indicates that the SEC is "seriously considering" possible amendments to the annual report and registration forms used by foreign private issuers. These possible amendments include the following:

• Eliminating the availability of the limited US GAAP reconciliation option that is contained in Item 17 of Form 20-F, as well as Forms F-1, F-3 and F-4, to all foreign private issuers other than Canadian multijurisdictional disclosure system issuers, so that these issuers are required to provide a full US GAAP reconciliation pursuant to Item 18 of Form 20-F;
• Amending Form 20-F, as well as Forms F-1 and F-4, to require disclosure about changes in the registrant’s certifying accountant similar to that required for domestic companies;
• Amending Form 20-F to require annual disclosure of the fees and other charges paid by holders of American Depositary Receipts to depositaries, as well as any payments made by depositaries to the foreign private issuers whose securities underlie the ADRs;
• Amending Form 20-F to require annual disclosure of the significant differences in the corporate governance practices of listed foreign private issuers compared to the corporate governance practices applicable to domestic companies under the relevant exchange listing standards; and
• Amending Form 20-F to require foreign private issuers to present information about highly significant, completed acquisitions.

If you have any questions about these proposed amendments, please contact any member of our Corporate & Securities practice.

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