Client Alert

SEC Adopts Amendments to Foreign Private Issuer Reporting Requirements

October 28, 2008

On September 23, 2008, the U.S. Securities and Exchange Commission (SEC) published final rules intended to enhance the information available to investors relating to foreign private issuers.¹ The 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 flows and the elimination of unnecessary barriers to capital markets. The new rules are substantially similar to the proposed rules published by the SEC on February 29, 2008, with the notable exception that the accelerated reporting deadline for Form 20-F annual reports has been set at four months after a foreign private issuer's fiscal year end instead of the proposed deadline of: (i) 90 days after fiscal year-end for accelerated and large accelerated files and (ii) 120 days after fiscal year end for all other foreign private issuers.² The new foreign private issuer reporting enhancement rules will take effect on December 6, 2008.

Main Amendments

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

• Annual Test for Foreign Private Issuer Status. This will allow companies to assess their status as foreign private issuers once a year, rather than on a continuous basis.
• Accelerating the Reporting Deadline for Form 20-F Annual Reports. This will require foreign private issuers to file their annual reports within four months of their fiscal year-end, instead of the currently allowed six-month period.
• Requiring Segment Data Disclosure. The amendment will 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 amendment will expressly reference the 2007 amendments governing deregistration and termination of reporting obligations of foreign private issuers in connection with going private transactions.

1. Annual Test for Foreign Private Issuer Status

a. 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. 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 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.

b. New Rule

The adopted 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. The SEC's new rule will 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 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 new amendments, it can immediately take advantage of the less burdensome foreign private issuer reporting requirements.

The last business day of the second fiscal quarter assessment date 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.

2. 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 felt that this extended period of time was 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. The SEC sought to 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.

In an effort to accomplish these goals by modernizing the periodic reporting system and harmonizing disclosure requirements applicable to U.S. domestic issuers and foreign private issuers, the SEC originally proposed 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 proposed providing a two-year transition period for all foreign private issuers.

The SEC received a large number of comments expressing a variety of concerns about the proposed due dates for Form 20-F filing. Some commenters noted that the burden faced by foreign private issuers in producing annual reports on Form 20-F was not related to the size of the issuer, but instead to whether the issuer would need merely to reconcile their home country accounting to U.S. GAAP or whether they would need to produce a second set of complete financial statements. Other commenters pointed out that in certain cases the proposed due dates would require foreign private issuers to file their Form 20-F before they are required to file their home country annual reports, effectively overriding domestic filing requirements.

After consideration of the comments, the SEC modified the Form 20-F deadline to allow all foreign private issuers to file their annual reports within four months after their fiscal year end, regardless of size. Furthermore, the SEC extended the proposed two-year transition period to three years. The SEC felt that the four month deadline was an appropriate accommodation for several reasons:

• The SEC noted that many foreign private issuers have three-month home country annual report filing deadlines and therefore the four-month Form 20-F filing period will allow such issuers an extra month to prepare their U.S. reports;
• Recent SEC rule amendments will allow foreign private issuers to file financial statements prepared in accordance with IFRS, as issued by IASB, without U.S. GAAP reconciliation, thereby expediting the Form 20-F preparation process; and
• The four-month Form 20-F filing deadline still provides more time for foreign private issuers to prepare and file their financial statements than is afforded to domestic filers.

3. 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 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 uses this accommodation and that it is inconsistent with recent changes in international financial disclosure, including IFRS, which also requires segment data disclosure. The SEC has therefore amended Item 17 of Form 20-F by removing Instruction 3, thereby eliminating foreign private issuers' exemption from the requirement to provide segment data disclosure in U.S. GAAP financial statements.

4. 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 Rule 13e-3 amendment is consistent with the 2007 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 amendment will modify Rule 13e-3(a)(3)(ii)(A) of the Exchange Act to specify that, in addition to the current 300 person 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.

Additional Amendments

In addition to the above amendments, the SEC has amended a number of other 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 being made. Item 17 requires some, but not all, financial information to be reconciled to U.S. GAAP, whereas Item 18 requires all financial information mandated by U.S. GAAP and Regulation S-X in addition to a reconciliation of such financial statements to U.S. GAAP. The SEC has adopted its proposal to require Item 18 compliance by foreign private issuers for all financial disclosures.

The SEC's objective with this amendment is to ensure that the same type of financial information is provided regardless of the 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.

• 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, 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 and S-4 and therefore are not currently subject to opinion shopping disclosures. The SEC has adopted an amendment to include an Item 16F of Form 20-F, which will require foreign private issuers to provide opinion shopping disclosures in annual reports on Form 20-F, as well as in their registration statements filed on Forms 20-F, F-1, F-3 and F-4. Foreign private issuers must comply with the new Item 16F beginning with their first fiscal year ending on or after December 15, 2009.

• 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 has adopted an amendment to revise Item 12.D.3. and the Instructions to Item 12 of Form 20-F to require disclosure of these fees on an annual basis, including the annual fee for general depositary services. Foreign private issuers must comply with the revised Item 12.D.3. beginning with their first fiscal year ending on or after December 15, 2009.

• 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 many of their corporate governance requirements, but provide that such issuers must disclose differences in corporate governance practices in annual reports and/or on the company's website. Many foreign private issuers opt to provide this disclosure on their websites, rather than in their annual reports. The SEC has adopted an amendment to add a new Item 16G to Form 20-F, which requires foreign private issuers to disclose in summary form in annual reports differences in corporate governance practices, 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.

Proposed Amendment Not Adopted

The SEC solicited comments on a proposed amendment to Item 17(a) of Form 20-F which would have required foreign private issuers to provide audited financial statements in their annual reports for acquisitions at the 50% or greater significance level during the fiscal year covered by such reports, as currently mandated for U.S. registered issuers by Rule 3-05 and Article 11 of Regulation S-X. Such reports must be provided for three fiscal years as prescribed by Rule 305(b)(2)(iv) of Regulation S-X. Unlike U.S. registered issuers, foreign private issuers do not currently have an obligation to provide such financial statements for significant completed acquisitions in their current or annual reports. Commenters expressed concerns that this requirement would be unnecessarily burdensome on foreign private issuers, as well as inconsistent with home country disclosure obligations, thereby creating a disparity between the information available to investors in a foreign private issuer's home country and in the U.S. The SEC decided not to adopt this amendment at the present time.