Are the regulations applicable to foreign companies in for a reassessment? You might draw that conclusion from reading the remarks from SEC Commissioner Mark Uyeda at the Harvard Law School Program on International Financial Systems, 2024 U.S.-China Symposium last week. Uyeda observes that, from its earliest days, the SEC has “recognized the unique nature of foreign companies accessing the U.S. capital markets, and its rules have afforded different treatment to foreign companies,” such as different forms for registration and reporting. But more recently, the SEC has applied several of its rules equally to domestic and foreign companies, an approach that, in Uyeda’s view, is inconsistent and suffers from the absence of a “clearly articulated regulatory philosophy.” He advises that the SEC should step back and undertake a more comprehensive review with a view toward the development of guiding principles—a “philosophy for when disclosure by foreign companies should be equivalent to disclosure by U.S. companies.” In particular, he advocates that the SEC reexamine the definition of “foreign private issuer”: while a test based on ownership and management may have made sense in 1983, does it still “reflect the realities of today’s global capital markets, corporate structures, and business practices”?
Recognizing that “foreign companies are different from U.S companies and, accordingly, may bear greater costs to comply with the same disclosure requirements,” the SEC has imposed regulations on foreign companies that differ in both frequency and substance. But how different should they be? In adopting regulations for foreign companies, the SEC has had to balance the fact that they may be subject to different national laws and customs, while, at the same time, U.S. investors still want much the same information as they would receive regarding domestic companies. Currently, an FPI files annual reports on Form 20-F and furnishes reports on Form 6-K “for any material information disclosed by the company under its home country laws, publicly reported pursuant to stock exchange requirements, or provided to its shareholders. Unlike domestic companies, foreign companies have never been required to file quarterly reports, and unless triggered by Form 6-K, they have never been required to file reports upon the occurrence of a significant corporate event, such as entry into a merger agreement or departure of an executive officer.”
The last comprehensive revision of Form 20-F occurred in 1999, conforming the report’s disclosure requirements to “the international disclosure standards endorsed by the International Organization of Securities Commissions with the goal of allowing the use of a “core disclosure document that, with a minimum of national tailoring, may be accepted in multiple jurisdictions.” Since 1999, however, Uyeda suggests, changes to the disclosure requirements for FPIs “have largely been piecemeal.” Beginning in 2012, FPIs became subject to the annual reporting requirements for conflict minerals, followed later by resource extraction disclosure. More recently, the SEC has imposed other rules on FPIs, such as the rules regarding stock buybacks (which were recently vacated by the Fifth Circuit, see this PubCo post), cybersecurity disclosure and 10b5-1 plans, and proposes to make FPIs subject to other rules, such as the climate disclosure rules. The application of these rules to FPIs, Uyeda explains, represents a departure from past practice: although the conflict minerals and resource extraction rules were mandated by Dodd-Frank, the SEC could have, but did not, use its exemptive authority; the other rules were not mandated by legislation. In explaining the rationale for its decisions, Uyeda observes, the SEC indicated that the “required disclosure is just as important for investment decisions in foreign companies as it is in U.S. companies and the agency’s desire for consistent and comparable information across all companies.” The exception identified by Uyeda—where the SEC has exempted FPIs—is where the “requirement is part of the proxy statement, which does not apply to foreign companies, or relates to executive compensation.”
And here’s the core of Uyeda’s argument: in light of
“the history of the SEC’s regulatory approach, the agency’s recent decisions to mostly treat U.S. and foreign companies alike with respect to disclosure requirements are confusing and have led to inconsistency. For example, is share repurchase information more important than earnings information, such that quarterly disclosure was necessary for it but not earnings? Why is there deference to foreign companies’ home country requirements for executive compensation disclosure but not to other areas, such as recoupment of executive compensation or disclosure of climate-related risks? What is the standard for when the SEC will exercise its authority to exempt foreign companies from general disclosure requirements mandated by Congress, in light of the agency’s historical considerations of differences in laws and business customs and increasing investment opportunities for U.S. investors?”
In other words, why is there no “clearly articulated regulatory philosophy” for determining disclosure obligations for foreign companies relative to domestic companies? The absence of considered principles in this regard, he says “hurts both investors and companies over the long term.”
To address this issue, Uyeda recommends that that SEC undertake a comprehensive review of the disclosure requirements for foreign companies, starting perhaps with a white paper or concept release that solicits public comment. He suggests that any analysis take into account the fact that the SEC’s historical approach of applying “different disclosure standards for U.S. and foreign companies has not resulted in large scale market failures” (with the possible exception of “outright fraud and material misstatements and omissions, which are concerns that would occur regardless of whether a company is filing on forms applicable to foreign companies or U.S. companies”).
As part of this review, Uyeda recommends that the SEC revisit the definition of FPI. Which companies should be eligible to use Forms 20-F and 6-K? The current test for FPIs dates back to 1983 and is based on “whether a majority of U.S. residents hold the company’s voting securities and whether a majority of the company’s operations are in the United States.” That may have worked in 1983, but does it “reflect the realities of today’s global capital markets, corporate structures, and business practices”? Now, you may have two companies, one incorporated and operating in the U.S. and one overseas, but both listed only on Nasdaq. In that case, the U.S. may well be “the sole capital market and source of public company disclosure requirements for both companies,” but the disclosure requirements are substantially different for each company. In particular, he points out, the current test does not take into account “whether the foreign company must comply with robust disclosure requirements from a jurisdiction other than the United States.” In the past, he contends, it was common for foreign companies to have their primary listings on foreign exchanges with their own disclosure requirements, with a secondary listing on Nasdaq or the NYSE. But that may no longer be the norm. In addition, he observes, “the increased use of corporate structures that separate voting power and economic interest may allow more foreign companies to keep a majority of their voting power outside of the United States while having their stock listed solely on a U.S. exchange. Accordingly, more and more foreign private issuers today may list their stock solely on a U.S. exchange.” Accordingly, in reevaluating the FPI definition, the SEC should consider whether the FPI designation should be limited to companies that are also listed on a foreign stock exchange that meets certain quality standards. The goal here is “to ensure that the SEC’s treatment of foreign companies reflects today’s global capital markets, and does not place U.S companies at a competitive disadvantage or deprive U.S. investors from receiving appropriate disclosure.”
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