Shearman & Sterling LLP 57 | The SEC's Regulation of Foreign Private Issuers
The proposed rules can be divided broadly into
two categories: new disclosure of climate-related
information and new financial statement disclosures.
If adopted as proposed, the new disclosure of climate-
related information would encompass disclosures with
respect to climate-related risks, impacts of climate
change on strategy, business model and outlook,
oversight and governance disclosure, risk management
disclosure, targets or goals and transition plans, if
any, Scope 1 and 2 GHG emissions metrics (including
for large accelerated filers and accelerated filers a
third-party attestation report covering at least Scope 1
and Scope 2 emissions) and Scope 3 GHG metrics, if
material, or if the company has set a GHG emissions
reduction target or goal that includes its Scope 3
emissions. The new financial statement disclosures
would create a new Article 14 to SEC Regulation S-X,
requiring certain climate-related disclosures in a
note to the company's annual financial statements
encompassing financial impact metrics, expenditure
metrics and financial estimates and assumptions.
These new financial statement metrics would be
subject to audit by the company's independent
auditors and fall within the scope of the company's
internal control over financial reporting.
Under the proposed rules, FPIs that present their
financial statements under home country GAAP with
reconciliation to U.S. GAAP would be required to use
U.S. GAAP as the basis for calculating and disclosing
the proposed climate-related financial statement
metrics, while FPIs that present their financial
statements under IFRS as issued by the IASB would
apply IFRS.
WHAT DOES THE FUTURE HOLD FOR FOREIGN
PRIVATE ISSUERS?
The latest rulemaking activity by the SEC suggests the
agency is moving away from its historical deference to
home country practice for FPI reporting. The extension
of rulemaking activity to FPIs may be warranted in
the name of investor protection—particularly with
more FPIs solely listed in the United States. It may
also be warranted to address regulatory arbitrage in
selecting a jurisdiction of incorporation and fairness of
treatment of all companies listed on U.S. exchanges. As
expressed by the SEC, FPIs that register in the United
States signal greater transparency and give assurance
of reliability of their disclosures by doing so, to the
benefit of investors.
Looking to the future, it will be important to bear in
mind the political climate and its impact on rulemaking
activity by the SEC. The increase in regulation of FPIs
will also continue to need to be balanced with the
countervailing argument favoring less regulation,
ensuring the markets in the United States remain
attractive, and therefore competitive. If the SEC
continues to increase its regulation of FPIs, it may also
lead to increased regulation for U.S. companies by
non-U.S. securities regulators. As one SEC
Commissioner noted in a statement released in
connection with the share repurchase amendments,
this "may be remembered as the beginning of the
end for the Commission's approach to foreign
private issuers."
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Previous attempts to expand the applicability of Section 16 through
the Holding Foreign Insiders Accountable Act introduced earlier in
2023 and in 2022 have not been successful. When introducing the
Holding Foreign Insiders Accountable Act, Senators Kennedy and
Van Hollen published an article in the Wall Street Journal outlining
the bill and citing to a study that argues for insiders of all U.S.
exchange-listed companies to be subject to the same disclosure
rules with respect to their trading activity, finding that certain
exempted companies "appear to trade in a highly opportunistic
and abusive manner." See "Foreign Companies Should Have to
Play by the Same Rules," https://www.wsj.com/articles/foreign-
companies-should-have-to-play-by-the-same-rules-china-russia-sec-
audits-disclosure-insider-trading-sarbanes-oxley-506929a3 (April
16, 2023); see also Jackson, Jr., Robert J. et al., "Holding Foreign
Insiders Accountable," (April 1, 2022), NYU Law and Economics
Research Paper No. 22-16", Jacobs Levy Equity Management
Center for Quantitative Financial Research Paper, https://ssrn.
com/%20abstract=4072797 or https://papers.ssrn.com/sol3/papers.
cfm?abstract_id=4072797.
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See Commissioner Mark Uyeda "Statement on the Final Rule:
Share Repurchase Disclosure Modernization," https://www.sec.gov/
news/statement/uyeda-statement-share-repurchase-disclosure-
modernization-050323 (May 3, 2023).
NATIONAL DEFENSE AUTHORIZATION ACT FOR
FISCAL YEAR 2024
In July 2023, the U.S. Senate passed the
National Defense Authorization Act for
Fiscal Year 2024 (NDAA), which, if enacted,
would be a significant extension of reporting
requirements to FPIs by extending Section
16 of the Exchange Act to FPIs. Section 16
requires company insiders (i.e., directors,
executive officers and greater than 10%
shareholders) to publicly report transactions
in the company's equity securities and to
disgorge profits on short-swing trading
(opposite-way transactions within six
months) in those securities. This would be a
substantial change for FPIs and their insiders,
adding another layer of U.S. regulation and
requiring FPIs to build new compliance and
administrative systems. If enacted in its
current form, the NDAA would require the SEC
to issue final regulations (or amend existing
regulations) implementing the changes no
later than 90 days following the enactment of
the NDAA.
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