SEC’s New Concept Release on Foreign Private Issuer Standards

This marks the SEC’s first comprehensive review of the FPI regulatory framework since 2008 and comes in response to shifts in the composition and overseas regulatory oversight of foreign issuers accessing US capital markets.

View concept release here.

Overview

The FPI regime was originally designed to accommodate foreign companies subject to meaningful home country regulation and whose securities were primarily traded in non-US markets. In recent years, however, the SEC has observed a marked increase in FPIs that are incorporated in jurisdictions with limited regulatory oversight with most of their equity trading occurring exclusively on US exchanges. According to the concept release, approximately 55% of Exchange Act reporting FPIs had little or no trading of their equity securities outside the United States.

The SEC is concerned that the current FPI definition may no longer ensure that only those issuers subject to robust foreign regulation and oversight benefit from the significant accommodations and exemptions available to FPIs, potentially disadvantaging US domestic issuers and reducing investor protections.

Proposals Under Consideration

The concept release seeks public input on possible approaches to revising the definition of an FPI. For example, the SEC is considering revising the existing two-prong test by lowering the US ownership threshold or tightening business contact requirements. Proposed updates also include introducing a minimum foreign trading volume requirement, mandating that FPIs maintain a listing on a major foreign exchange, and limiting FPI status to issuers from jurisdictions with robust regulatory frameworks and local disclosure requirements. Additional measures under consideration involve expanding mutual recognition systems to more countries with comparable standards and requiring that an FPI’s home country securities regulator participate in international cooperation arrangements to enhance cross-border enforcement.

Key Takeaways

If adopted, these changes could have far-reaching consequences for both existing and prospective FPIs.

• A substantial number of current FPIs, especially those incorporated in the Cayman Islands, the British Virgin Islands or headquartered in China, may lose their FPI status and become subject to the more rigorous reporting, governance, and disclosure requirements applicable to US domestic issuers.
• Affected issuers would need to comply with quarterly reporting requirements, US proxy rules, Regulation FD, Section 16 insider reporting, and to present financial statements in accordance with US generally accepted accounting principles.
• The transition could create significant compliance and operational challenges, particularly for issuers with limited experience in US domestic reporting.
• The SEC is also seeking input on appropriate transition periods and the potential market and investor impacts of any changes.