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Shearman & Sterling LLP 53 | The SEC's Regulation of Foreign Private Issuers The SEC's Regulation of Foreign Private Issuers Richard Alsop, Erika Kent, and Ryan Robski 1 The SEC's recent rulemaking activity shines a spotlight on its shifting approach to the regulation of foreign private issuers (FPIs). 2 The existing disclosure regime for FPIs was originally developed with a philosophy of deferring to home country practice, which helped make the United States attractive to foreign companies. Over time, however, specific disclosures applicable to FPIs have increased, and the SEC's recent rulemaking builds on this trend, with a number of the latest rules extending not only to U.S. domestic reporting companies but also to FPIs. Overall, this shift suggests that the SEC is less focused on not discouraging foreign companies from becoming FPIs as compared to ensuring investors are appropriately protected. It remains to be seen whether this approach continues, and what the resulting consequences may be. BACKGROUND ON THE REGULATION OF FOREIGN PRIVATE ISSUERS Historically, registrants qualifying as FPIs have been afforded significant relief from many of the disclosure requirements applicable to U.S. domestic reporting companies and instead have been permitted to defer to the law of their home country. For example, other than the annual report on Form 20-F, 3 which requires annual disclosures comparable to those required of U.S. domestic reporting companies in a Form 10-K, an FPI's periodic reporting requirements are limited to only material information that it (a) makes or is required to make public pursuant to the law of its home jurisdiction, (b) files or is required to file with a stock exchange on which its securities are traded and which was made public by that exchange, or (c) distributes or is required to distribute to its security holders. 4 Moreover, such disclosures, furnished on Form 6-K, are not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (Exchange Act) or otherwise subject to that section's liability regime, reducing the potential exposure to lawsuits in the United States. Other examples of more lenient regulation by the SEC include the fact that FPIs are exempt from complying with the proxy rules under Rule 3a12-3(b) of the Exchange Act, Regulation FD and several key corporate governance rules under the Dodd-Frank Act, as well as the fact that FPIs may provide significantly reduced disclosures relating to executive compensation. FPIs also may present financial statements pursuant to IFRS as issued by IASB (or home country accounting standards with a reconciliation to U.S. GAAP). Further, FPIs and their insiders are not subject to the insider trade reporting and short-swing profit recapture provisions of Section 16 of the Exchange Act. The New York Stock Exchange and Nasdaq corporate governance standards also generally defer to FPIs' home country practice, except for compliance with certain audit committee requirements. Historically, the motivation for the reduced regulation of FPIs has been driven in part by the desire to ensure that the U.S. capital markets remain attractive to foreign issuers, and therefore competitive with other 1 Special thanks to summer associate Elliann Dunbar for her assistance with this article. 2 A "foreign private issuer" is defined as a corporation or other organization incorporated or organized under the laws of a non-U.S. jurisdiction, unless the company meets the following conditions as of the last business day of its most recent second fiscal quarter: • More than 50% of the company's outstanding voting securities are directly or indirectly owned of record by U.S. residents; and • Any one or more of the following: o The majority of the company's executive officers or directors are U.S. citizens or residents; or o More than 50% of the company's assets are located in the United States; or o The company's business is administered principally in the United States. Securities Act Rule 405; Exchange Act Rule 3b-4(c). o Securities Act Rule 405; Exchange Act Rule 3b-4(c). 3 The current non-financial statement disclosure requirements of Form 20-F stem largely from the adoption of the international disclosure standards endorsed by the International Organization of Securities Commissions (IOSCO) in September 1998, with specific disclosures applicable to FPIs evolving over time. 4 FPIs are required to publish financial information on a semi-annual basis pursuant to New York Stock Exchange and Nasdaq rules. Insights