Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP The SEC's Regulation of Foreign Private Issuers | 56 In a departure from the officer concept applicable to the clawback rule and Rule 10b5-1 amendments, the senior management captured by the new disclosures are those members of management identified pursuant to Item 1 of Form 20-F. While the group of individuals captured by the rule will be familiar to FPIs, companies may need to establish a process for collecting trading activity data from directors and senior management, who may not have needed to provide this information previously since they are not subject to Section 16 reporting obligations, in contrast to their U.S. domestic company counterparts. FPIs also will be required to make certain narrative disclosures annually on Form 20-F (beginning with the fiscal year 2024 Form 20-F filed in calendar year 2025 for calendar year companies) with respect to share repurchase activity reported during the period related to the purposes of repurchases and the policies and procedures related to company purchases, as well as policies or procedures relating to sales of the company's securities by directors and senior management during a repurchase program. Cybersecurity Disclosures While the annual disclosure requirements relating to cybersecurity risk management and governance applicable to FPIs adopted in the SEC's cybersecurity disclosure rules are substantially identical to the disclosures required for U.S. domestic companies, incident reporting requirements differ, with the final rules providing no standalone U.S. disclosure trigger for cybersecurity incidents of FPIs. Form 6-K will be amended to specifically identify material cybersecurity incidents as reportable beginning on December 18, 2023; however, consistent with the current Form 6-K reporting regime, FPIs only will be required to report such incidents on Form 6-K that the company (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. Nonetheless, the amendment is an example of the SEC's shifting approach towards encouraging specific disclosures, and some FPIs may look to the incident reporting rules for U.S. domestic reporting companies for guidance on when to disclose cybersecurity incidents voluntarily. 12 The SEC noted in the adopting release that such filers are subject to the Canadian Securities Administrators' 2017 guidance with respect to cybersecurity risk and incident disclosures. The new rules also will require FPIs, beginning with the fiscal year 2023 Form 20-F filed in calendar year 2024 for calendar year companies, to annually disclose the same cybersecurity risk management, strategy and governance disclosures with respect to cyber risk management and strategy and governance as required by U.S. domestic companies. MJDS filers will not be required to comply with the governance disclosures mandated by the final rules, but will rather continue to include cybersecurity disclosure required under Canadian securities laws reflected in their Form 40-F filings. 12 Beneficial Ownership Reporting Under existing beneficial ownership rules, an investor who beneficially owns greater than five percent of equity securities of a public company must publicly disclose its ownership, including changes in ownership, and certain other information on Schedule 13D or 13G, as applicable, according to specific filing deadlines. The SEC's recently adopted beneficial ownership reporting amendments, which apply to reporting of beneficial ownership in reporting companies, including FPIs, will shorten the filing deadlines on Schedule 13D and 13G. The SEC also provided guidance on the applicability of existing Rule 13d-3 to certain cash- settled derivative securities, as well as guidance on the applicability of Exchange Act Sections 13(d)(3) and 13(g)(3) with respect to the formation of a group. It is unsurprising that the amendments apply to FPIs, as the current forms apply to both U.S. domestic companies and FPIs. While the burden of compliance with the beneficial ownership reporting rules lies with investors rather than the reporting companies, the amendments are notable to reporting companies, as we expect the faster filings will help companies to identify changes in ownership and potential shareholder activism more expeditiously. It remains to be seen whether the SEC's new guidance and amendments will result in significantly increased reporting by holders who hold cash-settled derivative positions and of soft cooperative activities by investors, such as hedge funds, seeking to otherwise avoid triggering group reporting. Proposed Rules Climate-Related Disclosures If adopted as proposed, the SEC's climate-related disclosure framework would substantially expand the reporting obligations for public companies, including FPIs (other than MJDS filers). The SEC indicated that it was not proposing to generally exempt FPIs from the proposed climate-related disclosures on the basis that climate-related risks may be significant to a company's operations and financial condition, whether domestic or foreign.