Commissioner Uyeda calls for the development of guiding principles on disclosure requirements for foreign companies | Cooley limited liability company

Are regulations regarding foreign companies awaiting reassessment? You might draw that conclusion by reading SEC Commissioner Mark Uyeda’s remarks last week at the 2024 U.S.-China Symposium of the Harvard Law School Program on International Financial Systems. Uyeda notes that since its inception, the SEC has “recognized the unique nature of foreign companies accessing U.S. capital markets, and its rules provided for foreign companies to be treated differently,” such as different forms of registration and reporting. However, the SEC recently applied several of its rules equally to domestic and foreign companies, which Uyeda said is inconsistent and plagued by a lack of a “clearly articulated regulatory philosophy.” He advises that the SEC step back and conduct a more comprehensive review to develop guiding principles – “a philosophy specifying when disclosures by foreign companies should be equivalent to disclosures by U.S. companies.” In particular, he advocates that the SEC re-examine the definition of “foreign private issuer”: while the ownership-and-management-based test 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 therefore may incur greater costs to meet the same disclosure requirements,” the SEC has imposed regulations on foreign companies that vary in both frequency and content. But how different should they be? In regulating foreign companies, the SEC 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 largely the same information they would receive about domestic companies. Currently, FPI files annual reports on Form 20-F and provides reports on Form 6-K “for any material information disclosed by a company under the laws of its home country, reported publicly as required by an exchange, or communicated to its shareholders.” Unlike domestic companies, foreign companies have never been required to file quarterly reports and, unless required by Form 6-K, have never been required to report when a material corporate event occurs, such as the entry into a merger agreement or the departure of executive officer.”

The last comprehensive revision of Form 20-F occurred in 1999, aligning the report’s disclosure requirements with “international disclosure standards approved by the International Organization of Securities Commissions to enable the use of a “basic disclosure document that, with minimal domestic tailoring, can be accepted in many jurisdictions.” But since 1999, Uyeda suggests, changes to disclosure requirements for FPIs “have been largely piecemeal.” Beginning in 2012, FPIs became subject to annual reporting requirements for conflict minerals, followed later by disclosures on resource extraction. Recently, the SEC has imposed other rules on FPIs, such as the stock buyback rules (which were recently exempted by the Fifth Circuit, see this PubCo post), cybersecurity disclosures, and 10b5-1 plans, and is proposing to subject FPIs to other rules, such as rules for disclosing climate information. The application of these rules to FPIs, Uyeda explains, is a departure from past practice: Although Dodd-Frank imposed rules on the extraction of conflict minerals and resources, the SEC could have exercised its exclusive authority, but did not; the remaining rules were not required by legislation. Uyeda notes that in explaining the rationale for its decisions, the SEC indicated that “required disclosures are as important for investment decisions in foreign companies as they are for U.S. companies, and also for the agency’s desire to obtain consistent and comparable information across all companies. The exception identified by Uyeda – where the SEC has exempted FPIs – is when “the requirement is part of a proxy statement that does not apply to foreign companies or relates to executive compensation.”

And this is the crux of Uyeda’s argument: in the light

“The SEC’s history of regulatory approach and the agency’s recent decisions to treat U.S. and foreign companies equally regarding disclosure requirements are confusing and have led to inconsistencies. For example, was share repurchase information more important than earnings information, so that quarterly information but not earnings had to be disclosed? Why are foreign companies’ home country requirements for executive compensation disclosure respected, but not other areas such as executive compensation recovery or climate risk disclosure? What will be the standard when the SEC exercises its authority to exempt foreign companies from general disclosure requirements imposed by Congress, in light of the agency’s historical considerations of differences in laws and business customs and growing investment opportunities for U.S. investors?

In other words, why is there no “clearly expressed regulatory philosophy” defining the disclosure obligations of foreign companies vis-à-vis domestic companies? The lack of well-thought-out rules in this area, in his opinion, “damages both investors and companies in the long run.”

To address this issue, Uyeda recommends that the SEC conduct a comprehensive review of the disclosure requirements applicable to foreign companies, perhaps starting with a white paper or publication of a concept that requires public comment. He suggests that any analysis should take into account the fact that the SEC’s historical approach of applying “different disclosure standards to 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, these are concerns that will arise whether a company files forms applicable to foreign companies or to U.S. companies).

As part of this review, Uyeda recommends that the SEC re-examine the definition of FPI. Which companies should be eligible to use Forms 20-F and 6-K? The current test for FPI dates back to 1983 and is based on “whether a majority of U.S. residents own a company’s voting securities and whether a majority of the company’s operations occur in the United States.” It may have worked in 1983, but does it “reflect the realities of today’s global capital markets, corporate structures and business practices”? You can have two companies, one registered and operating in the US, the other abroad, but both listed exclusively on the Nasdaq stock exchange. In such a case, the United States may well be “the sole capital market and source of public company disclosure requirements for both companies,” but the disclosure requirements are fundamentally different for each company. Specifically, it notes that the current test does not take into account “whether a foreign company must comply with stringent disclosure requirements in a jurisdiction other than the United States.” In the past, he said, foreign companies often listed their main shares on foreign exchanges with their own disclosure requirements and then listed on the Nasdaq or NYSE. But this may no longer be the norm. It further notes that “the increased use of corporate structures that separate voting power from economic interests may allow more foreign companies to retain most of their voting power outside the United States while having their shares listed exclusively on a U.S. stock exchange.” As a result, more and more foreign private issuers can now list their shares only on the US stock exchange.” Therefore, when re-evaluating the FPI definition, the SEC should consider whether the FPI designation should be limited to companies that are also listed on a foreign securities exchange and meet certain quality standards. The goal 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 of the opportunity to receive appropriate information.”

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