Question à l’étude : les émetteurs privés étrangers sous la loupe de la SEC

Overview

Do the U.S. securities law accommodations through the “foreign private issuer” (FPI) construct benefit the intended entities? That’s the fundamental question that the U.S. Securities and Exchange Commission (SEC) is analyzing in its recently published concept release.

Key takeaways from a Canadian perspective are the following:

• Status quo for MJDS issuers. Canadian issuers operating under the Canada-U.S. multijurisdictional disclosure regime (MJDS) are not the target of the concept release.¹ However, there could be collateral damage if the SEC amends the FPI definition in a manner that prevents some Canadian issuers from continuing to qualify.
• Uncertainty for non-MJDS issuers. The approximately 75 Canadian FPIs that do not qualify for MJDS² are treated like all other FPIs and should follow developments carefully since their access to the U.S. capital markets could be significantly affected in the same manner as other FPIs.

Concept Release

The SEC is soliciting public comment on the definition of FPI.³ Specifically, in light of the significant change in the FPI population’s composition since 2003, the SEC is considering whether the FPI definition, which has not been modified since 1999, should be changed to better represent the foreign issuers that were intended to benefit from various disclosure and other accommodations, while continuing to protect investors and promote capital formation.

Advantages of FPI Status

FPIs enjoy meaningful accommodations that exempt them from the more onerous requirements applicable to U.S. domestic issuers under SEC rules and the listing rules of the New York Stock Exchange (NYSE) and Nasdaq. For example:

• FPIs may file registration statements and annual reports on less onerous forms, and are exempt from filing quarterly and current reports on forms used by U.S. domestic issuers.
• FPIs may present their financial statements using (1) International Financial Reporting Standards, as issued by the International Accounting Standards Board; (2) U.S. generally accepted accounting principles (GAAP); or (3) another comprehensive set of accounting principles with a reconciliation to U.S. GAAP.
• FPIs (and their insiders) are exempt from insider reporting and “short swing” profit disgorgement requirements.
• FPIs are exempt from proxy solicitation rules and related disclosure requirements, and certain advisory votes on executive compensation and golden parachute compensation (say-on-pay and frequency rules).
• FPIs are exempt from Regulation FD obligations (which address selective disclosure of material non-public information).
• FPIs may follow home country governance rules in lieu of most of the NYSE and Nasdaq listing rules on corporate governance, including requirements to obtain shareholder approval of certain transactions and equity incentive plans.

The SEC’s objective in providing these special accommodations to FPIs is that they “preserve access for U.S. investors to [FPIs’] securities while maintaining appropriate investor protections.”⁴ These accommodations achieve this objective on the “understanding that, while legal and regulatory requirements differ across home country jurisdictions, most eligible FPIs would be subject to meaningful disclosure and other regulatory requirements in their home country jurisdictions.”⁵

Changing Character of FPI Population

The SEC’s analysis excluded Canadian MJDS issuers. The number of Canadian MJDS issuers has not changed dramatically since 2003. For over three decades, MJDS has operated successfully as a mutual regulatory recognition system. The SEC’s analysis reveals that the remaining FPI population has changed significantly over the 20-year period from 2003 to 2023. The following two key trends have caused the SEC to reconsider which foreign issuers should be afforded the special accommodations listed above:

• In 2003, the most common non-MJDS FPIs were Canadian and U.K. issuers (which are subject to familiar home country regulation). In 2023, the most common jurisdiction of incorporation of FPIs was the Cayman Islands and the most common jurisdiction of headquarters was China. The increased divergence between jurisdictions of incorporation and jurisdictions of headquarters, coupled with the fact that China-based issuers represented roughly 28% of all non-MJDS FPIs in 2023 (a greater than five-fold increase in the proportion of non-MJDS FPIs that were China-based in 2003), raises concerns about whether these issuers are subject to meaningful disclosure and other regulatory requirements in their home country jurisdictions.
• U.S. stock markets are the near-exclusive trading markets for more than a majority of non-MJDS FPIs (increasing from 45% in 2014 to 55% in 2023), implying limited home country regulation for these FPIs.

As a result, unlike MJDS issuers, which are subject to a robust regulatory regime in Canada, the U.S. regulatory framework may be the primary or sole source of reporting requirements of FPIs in other jurisdictions. This situation is at odds with the original expectation (when the FPI concept was introduced in 1935) that FPIs would be subject to meaningful home country disclosure and other regulatory requirements.⁶ The SEC is concerned about the regulatory arbitrage that certain foreign issuers have been enjoying.

Possible Narrowing of FPI Definition

To address this, the SEC is considering its options through a broad lens and is seeking feedback on the following series of potential approaches to ensuring that only deserving foreign issuers receive the accommodations made available to FPIs:

• update and refine the definition of FPI;
• impose a foreign trading volume requirement;
• impose a requirement for a listing on a major foreign exchange;
• require each FPI to be (1) incorporated or headquartered in a jurisdiction that the SEC has determined to have a “robust regulatory and oversight framework” for issuers and (2) be subject to such securities regulations and oversight (without modification or exemption) that the SEC deems adequate for the protection of U.S. investors;
• develop mutual recognition systems with foreign jurisdictions (e.g., the United States and a home country enter into a mutual recognition system, such as the Canada-U.S. MJDS); and
• impose an international cooperation arrangement requirement (i.e., an FPI would certify that it is formed or headquartered in a home country that is a member jurisdiction of the International Organization of Securities Commissions, which is a party to agreements on information sharing).

Our Perspective

It is not the first time that accommodations available to FPIs have been scrutinized. As we reported in our bulletin last year, these accommodations were subject to political attack: a piece of proposed legislation in the 2,000+ page 2024 defence bill sought to strip all FPIs (including MJDS issuers) of the exemption from U.S. insider reporting and short swing profit disgorgement requirements. The proposed legislation was eliminated through the reconciliation process between the Senate and the House.

Though not necessarily a consequence of the failed legislation, the concept release allows the SEC to take a thoughtful and precise approach to the accommodations (after considering all public comments) and, more important, to which issuers should benefit from the accommodations, while ensuring that U.S. domestic issuers are not materially disadvantaged by the more onerous disclosure and corporate governance requirements applicable to them.