Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP 55 | The SEC's Regulation of Foreign Private Issuers familiar to U.S. domestic reporting companies from the Section 16 reporting context. However, because FPIs are not subject to Section 16 reporting, they likely needed in the first instance to take steps to identify those individuals to whom the policy is applicable. Additionally, for those FPIs that report their financial statements in accordance with IFRS as issued by IASB, the criteria for assessing whether a restatement is required is not the same as that for companies reporting under GAAP, which may lead to inconsistent application of the rule. Amended Rule 10b5-1 and Insider Trading Policy Disclosure The SEC's amendments introducing insider trading policy disclosures and significantly changing the requirements for Rule 10b5-1 plans are largely applicable to FPIs (other than MJDS filers), except for certain disclosure requirements related to entering into Rule 10b5-1 plans. Under the amendments, an FPI will need to disclose annually on Form 20-F (beginning with the fiscal year 2024 Form 20-F to be filed in calendar year 2025 for calendar year companies) whether the company has adopted any insider trading policies (and if not, why not) and file such policies as exhibits to Form 20-F. The Rule 10b5-1 amendments, currently in effect, include: (a) a mandatory cooling-off period for insiders, (b) limitations on overlapping and single trade plans, (c) a requirement that individuals and companies relying on Rule 10b5-1 must act in good faith with respect to the plan, and (d) certifications by directors and officers at the time they enter a Rule 10b5-1 plan (in the form of a representation in the plan itself) that they are not aware of any material non-public information and that they are adopting the plan in good faith and not as a scheme to avoid the prohibition on insider trading. In response to comments raised recommending the exemption of FPIs from insider trading policy disclosures, the SEC pointed to the likely importance to investors of information about a company's efforts to prevent the misuse of material non-public information regardless of whether it is a U.S. domestic issuer or an FPI. Similar to the clawback rule, the application of Rule 10b5-1 requires identification of the officers implicated by the rule and may require FPIs to newly identify the officers (as defined in Rule 16a-1(f), not otherwise applicable to FPIs) implicated by the amendments. FPIs will also need to ensure that their insider trading policies are ready for public scrutiny to the extent they have not been previously made public. Share Repurchase Disclosures The SEC recently adopted its share repurchase disclosure modernization rule requiring FPIs to report on a quarterly basis daily share repurchase activity and to annually make certain related narrative disclosures. On November 22, 2023, the SEC issued an order postponing the effective date of the rule. 10 As a result, the actual date when companies must begin to provide this disclosure is uncertain. More importantly, it also remains to be seen whether the rule survives this legal challenge. The following discussion describes the requirements of the rule in its current form. Please note that we expect that, at the very least, the compliance dates discussed below will be extended. The rule in its current form introduces a new Form F-SR, which mandates disclosure of daily share repurchase activity on a quarterly basis for FPIs (other than MJDS filers) 11 , beginning with the second fiscal quarter of 2024 for calendar year companies. FPIs also will be required to disclose on Form F-SR any trading activity by directors or senior management within four business days before or after the announcement of a repurchase plan or program or increase of a plan program, irrespective of whether such activity is under a Rule 10b5-1 trading plan. This new quarterly reporting requirement on Form F-SR, which will be treated as "filed" for purposes of Section 18 of the Exchange Act, marks a fairly significant change from the SEC's historical deference to home country practice. This quarterly reporting obligation is particularly notable given FPIs are required to publish financial information only on a semi-annual basis pursuant to New York Stock Exchange and Nasdaq rules. The SEC acknowledged that certain reportable information under the rule is already available from other sources for domestic companies, due to Section 16 reporting obligations, which is not the case for FPIs. 10 The SEC's order postponing the effective date of the rule follows a decision by the U.S. Court of Appeals for the Fifth Circuit on October 31, 2023, in response to a petition for review filed by the U.S. Chamber of Commerce. The court found that the SEC had failed to respond to the Chamber's comments on the rule proposal and failed to conduct a proper cost-benefit analysis with respect to the rule in violation of federal law. As a result, the court granted the petition for review and directed the SEC to correct the defects in the rule by November 30, 2023. 11 According to the adopting release, the amended repurchase disclosure requirements do not apply to MJDS filers because such filers are subject to a separate reporting regime.