Client Alert

SEC Proposes Changes to Foreign Private Issuer Reporting Requirements Intended to Improve Accessibility of the U.S. Public Capital Markets and Information Available to Investors

March 18, 2008

On February 29, 2008, the U.S. Securities and Exchange Commission (SEC) published for comments proposed rule changes intended to improve the accessibility of the U.S. public capital markets to foreign private issuers, as well as to enhance the information available to investors from these issuers. The proposed rule changes are part of a wider SEC initiative to streamline foreign private issuer reporting requirements in light of market developments and new technologies in order to promote investor protection, cross-border capital flow and the elimination of unnecessary barriers to capital markets.

Proposed Amendments

The SEC has proposed the following amendments to rules and forms which are intended to enhance the reporting of information by foreign private issuers and reduce the timeframe in which such information is provided to investors.¹

• Annual Test for Foreign Private Issuer Status. This would allow companies to assess their status as foreign private issuers once a year, rather than continuously. 
• Accelerating the Reporting Deadline for Form 20-F Annual Reports. This would require foreign private issuers that qualify as accelerated and large accelerated filers to file their annual reports within 90 days of their fiscal year-end, and all other foreign private issuers 120 days of their fiscal year-end, instead of the currently allowed six-month period. 
• Requiring Segment Data Disclosure. The proposed amendment would remove an option that currently allows foreign private issuers to omit segment data disclosure from their U.S. GAAP financial statements in their annual reports on Form 20-F. 
• Exchange Act Rule 13e-3. The proposed amendment would expressly reference the recently adopted rules governing deregistration and termination of reporting obligations of foreign private issuers in connection with going-private transactions. 

Annual Test for Foreign Private Issuer Status

    Current Standard

Currently, foreign private issuers must assess their foreign private issuer status on a "continuous" basis which the SEC has interpreted to mean (i) at the end of each fiscal quarter and (ii) at the completion of certain purchases and sales of assets or equity securities.² Foreign private issuer status is important because it affords exemptions from many requirements imposed on U.S. issuers.

The need for constant monitoring and possible conversion from foreign private issuer status to a U.S. domestic issuer status in the middle of a fiscal year can create difficulties for issuers, such as switching to U.S. GAAP accounting basis, filing interim reports on Form 8-K, providing executive compensation disclosures, complying with proxy rules and other reporting requirements under Section 16 that are currently not applicable to foreign private issuers. The proposed rule amendments are intended to facilitate a smooth transition when foreign private issuers change their status and provide greater certainty as to the status of foreign private issuers within a given reporting period.

    New Rule

The SEC is proposing to permit foreign private issuers to assess their status once a year, on the last business day of their second fiscal quarter.

• If a foreign private issuer determines on the assessment date that it no longer qualifies for such status, then it will have until the first day of the following fiscal year (i.e., six-month's notice) to comply with all the reporting requirements prescribed for U.S. domestic issuers. 
• On the other hand, if a U.S. reporting company determines on the assessment date that it has qualified for foreign private issuer status then, under the proposed amendments, it could immediately take advantage of the less burdensome foreign private issuer reporting requirements.

The proposed assessment date of the last business day of the second fiscal quarter is intended to provide regulatory consistency and ease of application as it coincides with the assessment dates for accelerated filer status under Exchange Act Rule 12b-2 and smaller reporting company status in Item 10(f)(2)(i) of Regulation S-K.

Accelerating the Reporting Deadline for Form 20-F Annual Reports

A foreign private issuer must currently file its annual report on Form-20 within six months after its fiscal year-end. This time frame was initially established as an accommodation to the different disclosure requirements in foreign private issuers' home jurisdictions and the need to prepare U.S. GAAP reconciliations and English translations of financial statements prepared in accordance with the accounting principles applicable in the foreign private issuer's home jurisdiction.

The SEC feels that this extended period of time is anachronistic in light of the vastly expedited basis in which information can now be gathered and disseminated compared to when Form 20-F was originally conceived in 1979. In addition, the SEC notes that many foreign private issuers will now require less time to prepare their SEC filings in light of the recent rule amendment that permits foreign private issuers that prepare financial statements in accordance with International Financial Reporting Standards (IFRS) to omit a reconciliation of such financial statements to U.S. GAAP.

Consistent with the SEC's effort to modernize the periodic reporting system and harmonize disclosure requirements applicable to U.S. domestic issuers and foreign private issuers, the SEC is proposing to accelerate the due date for annual reports on Form 20-F to:

• within 90 days after the foreign private issuer's fiscal year-end in the case of large accelerated and accelerated filers; and 
• within 120 days after the foreign private issuer's fiscal year-end for all other foreign private issuers.

Additionally, the SEC will provide a two-year transition period pursuant to which the accelerated reporting deadlines for foreign private issuers will not go into effect until fiscal years ended on or after December 15, 2010.

The SEC notes that such accelerated filing will provide investors with more timely access to information and improve the delivery and flow of reliable information to the capital markets, thereby improving market efficiency. Furthermore, the SEC highlights that the proposed timetable still provides foreign private issuers an accommodation, as large accelerated and accelerated domestic filers are required to file their annual reports on Form 10-K within 60 days and 75 days, respectively, of their fiscal year-ends.

Segment Data Disclosure

Under Item 17 of Form 20-F, foreign private issuers that present financial statements otherwise fully in compliance with U.S. GAAP may omit segment data from their financial statements, which as a result, allows them to file qualified U.S. GAAP audit reports on such financial statements.

The SEC estimates that only a handful of foreign private issuers currently use this accommodation and that it is inconsistent with recent changes in international financial disclosure, including IFRS, which also requires segment data disclosure. The proposed amendments would remove Instruction 3 to Item 17 of Form 20-F, thereby eliminating foreign private issuers' exemption from the requirement to provide segment data disclosure in U.S. GAAP financial statements.

Exchange Act Rule 13e-3

Rule 13e-3 of the Exchange Act requires any issuer or affiliate to file a Schedule 13E-3 when such issuer or affiliate plans to take the company private. The Schedule 13E-3 must, among other things, disclose the purpose of the going-private transaction in order to provide the issuer's security holders with a final opportunity to obtain information about the company and consider alternatives. Currently, the rule applies to situations where an issuer is deregistering because either (i) the class of securities will be held by less than 300 persons, or (ii) the securities will no longer either be listed on a national exchange or authorized to be quoted on an inter-dealer quotation system.
The SEC has proposed to amend Rule 13e-3 to reflect a recent amendment to the rules governing deregistration and termination of reporting obligations by foreign private issuers, which allows such issuers to deregister and terminate their reporting obligations by meeting a quantitative benchmark designed to measure relative U.S. market interest for their equity securities that does not depend on a head count of the issuer's U.S. security holders.³

The proposed amendments would modify Rule 13e-3(a)(3)(ii)(A) of the Exchange Act to specify that, in addition to the current 300 head count test and delisting criteria discussed above, 13e-3 termination provisions are also deemed to have occurred when the consequence of a specified transaction is to cause a domestic or foreign issuer to become eligible to deregister under Exchange Rules 12g-4 and 12h-6, respectively.

Other Matters Highlighted for Comment and Consideration

In addition to the proposed amendments, the SEC is soliciting comments on a number of different areas related to foreign private issuer disclosure requirements.

• Requiring Item 18 information in Annual Reports and Registration Statements Filed on Form 20-F

Items 17 and 18 of Form 20-F currently require different levels of financial disclosures depending on the type of securities a foreign private issuer seeks to list on a domestic exchange and the type of offering or transaction. Item 17 requires some, but not all, financial information to be reconciled to U.S. GAAP, whereas Item 18 requires all financial information required by U.S. GAAP and Regulation S-X in addition to a reconciliation of such financial statements to U.S. GAAP. The SEC is soliciting comments to a proposal to require Item 18 compliance by foreign private issuers for all financial disclosures.

The SEC's objective with this proposed amendment would be to ensure that the same type of financial information is provided regardless of type of offering being made. Currently, foreign private issuers are not required to provide the extensive footnote disclosures required by U.S. GAAP and Regulation S-X, unless these disclosures are otherwise required under the accounting principles or regulations of the home country. Footnote disclosure related to pension assets, obligations and assumptions, stock compensation awards and financial instruments and derivatives are not required under Item 17 unless required by the home country's rules.⁴

• Disclosure About Changes in a Registrant's Certifying Accountant

Domestic companies are required to report any changes in and disagreements with their certifying accountants in a current report on Form 8-K and in a registration statement on Form 10 under the Exchange Act, and under Forms S-1 and S-4 under the Securities Act. Such information is commonly referred to as "opinion shopping" and is a required disclosure under Item 304 of Regulation S-K.

Foreign private issuers do not file Forms 8-K, 10, S-1 or S-4 and therefore are not currently subject to opinion shopping disclosures. The SEC is soliciting comments regarding the inclusion of an Item 16F of Form 20-F, which would require foreign private issuers to provide opinion shopping disclosures in annual reports on Form 20-F, as well as in their initial registration statements filed on Forms 20-F, F-1 and F-4.

• Annual Disclosure About American Depository Receipt (ADR) Fees and Payments

Currently, disclosures about fees and other payments made by ADR holders to the depositary are provided by foreign private issuers in their initial registration on Form 20-F but not in annual reports. The SEC is soliciting comments on a proposal to revise Item 12.D.3. and the Instructions to Item 12 of Form 20-F to solicit disclosure of these fees on an annual basis, including the annual fee for general depositary services.

• Disclosure About Differences in Corporate Governance Practices

Due to differences in corporate governance practices between the U.S. and the home jurisdictions of many foreign private issuers, many U.S. securities exchanges exempt foreign private issuers from their corporate governance requirements, but provide that such issuers must disclose differences in corporate governance practices either in annual reports or on the company's website. The SEC is soliciting comments on a proposal to add a new Item 16G to Form 20-F, which would require foreign private issuers to disclose in summary form differences in corporate governance practices in annual reports, thereby centralizing the disclosures of a listed foreign private issuer in one location and harmonizing the disclosure required by the SEC's rules and the rules of the principal U.S. securities exchanges.

• Financial Information for Significant, Completed Acquisitions

Unlike domestic companies, foreign private issuers are not currently required to provide financial statements for significant, completed acquisitions in their current or annual reports.

The SEC is soliciting comments on a proposed amendment to Item 17(a) of Form 20-F which would require foreign private issuers to provide financial statements in their annual reports for acquisitions at the 50% or greater significance level during the fiscal year covered by the report. Pursuant to Rule 3-05 of Regulation S-X, such financial statements must be provided for a period covering three fiscal years. The SEC is not proposing to require financial information about probable acquisitions, or financial information for the aggregation of individually insignificant acquisitions.

If the proposed amendments to the Form 20-F filing deadlines are adopted as proposed, the additional disclosure required by this proposed rule change could be particularly burdensome for some foreign private issuers that have completed significant acquisitions.

Comments Sought

Comments with regard to the SEC proposal are due by May 12, 2008. Information on submitting comments to the SEC can be found on the SEC’s website at www.sec.gov/rules/submitcomments.htm.

<sup>1. Release Nos. 33-8900; 34-57409; International Series Release No. 1308; File No. S7-05-08, Foreign Issuer Reporting Enhancements (February 29, 2008), available at http://www.sec.gov/rules/proposed/2008/33-8900.pdf.
2. See Release Nos. 33-8900; 34-57409, page 15, fn. 38.
3. Release No. 34-55540 (March 27, 2007) [72 FR 16934].
4. Release Nos. 33-8900; 34-57409, page 36.</sup>

Read about other SEC Proposals relating to foreign private issuers.