SEC seeks tighter foreign firm deadlines, web disclosures

THE US Securities and Exchange Commission (SEC) is proposing to shorten annual report filing deadlines for foreign companies from six months to 90 days for large companies and 120 days for smaller companies.

At the same time, the SEC is proposing to require foreign companies that have established Level 1 ADR programs to publish their home-market disclosures in English on their websites rather than make paper filings to the commission. The objective is to increase US investors’ access to information and harmonize reporting requirements for foreign companies with Level 1 ADR programs.

Corporation Finance Director John White said at the commission’s open meeting that the SEC wants to hear from companies on the feasibility of the new filing deadlines for annual reports on Form 20-F. The dramatically shorter deadlines are not expected to pose a challenge for most issuers since many companies already report within 90 days of their year-end.

However, some companies in Europe, where the Transparency Directive requires annual reports to be published within 120 days, may have difficulty meeting the new deadlines. The SEC is also proposing a number of enhancements to the 20-F requirements.

Harmonized web reporting for Level 1 ADR firms

Meanwhile, the commission is proposing to harmonize how it treats foreign companies whose securities trade in the over-the-counter market, most often as sponsored Level 1 ADRs.

Last year, the SEC made it easier for foreign companies to deregister from the SEC and escape rigorous reporting requirements, including the dreaded Sarbanes-Oxley internal control provisions. Under the new rules, foreign companies could deregister if their average daily trading volume in the US is no more than 5% of the average daily trading volume on a worldwide basis during a recent 12-month period. Prior to this, companies had to have fewer than 300 US shareholders before they could deregister.

About 100 companies quickly took advantage of the new rule, but rather than leave the US entirely, many converted their securities to Level 1 ADRs listed on the US over-the-counter market. These companies were able to permanently terminate any SEC reporting obligations if, under new Rule 12g3-2(e), they continuously posted disclosure documents required in their home markets in English on their websites or a public regulatory database similar to EDGAR.

However, this created inconsistencies in how the SEC treated foreign companies with Level 1 ADR programs, since companies which had not deregistered prior to establishing their ADR programs were not required to provide online access to their home country reporting documents. Instead, they provided paper documents to the SEC and were subject to ownership-based registration thresholds.

Yesterday’s rule proposals will now seek to eliminate the requirement for these companies to file paper documents with the SEC and require them to post their ongoing primary-market disclosures in English on their websites or with a foreign regulatory database.

To remain free of having to report to the SEC, a company’s average daily trading volume in the US can be no greater than 20% of its worldwide average daily trading volume and it must continue to have a primary listing on a foreign market.

More generally, the SEC’s White said the commission’s staff was interested to receive comments from companies, investors and industry participants on other ways to improve rules for foreign companies.

For more, see the SEC’s news release announcing the proposals and the opening remarks by Corporation Finance staff Elliot B. Staffin and Felicia H. Kung.

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