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SEC Commissioner Uyeda On Foreign Company Disclosures

Uyeda

Recently, various SEC officials have delivered speeches in connection with the 90th anniversary of the Securities and Exchange Commission (SEC).

This speech by SEC Commissioner Mark Uyeda focused on foreign company disclosures.

In recent years, approximately 1,000 foreign companies (the number fluctuates each year) have shares traded on a U.S. exchange and thus qualify as “issuers” making such companies subject to a variety of securities laws including the Foreign Corrupt Practices Act.

Set forth below are portions of Uyeda’s speech:

“From the earliest days of the SEC’s existence, the agency has recognized the unique nature of foreign companies accessing the U.S. capital markets, and its rules have afforded different treatment to foreign companies.  For example, in July 1935, the SEC created separate forms to be used by foreign companies to register a class of securities under the Exchange Act. In creating these different forms, the SEC explained that its requirements for U.S. companies must be adapted to the “peculiar circumstances” of foreign companies and that “[i]n view of the disparity between the laws and practices existing in [different] countries[,] it was necessary to introduce great flexibility in the requirement Later in 1935, the SEC exempted foreign companies from its rules governing proxy solicitations and trading in a company’s securities by directors and officers.

These decisions from the 1930s continue to stand today, but the capital markets are constantly evolving.  In 2024, there are significant connections between global capital markets in Europe, Asia, the United States, and elsewhere.  As we look to the future of foreign companies accessing the U.S. capital markets, how should the SEC regulate those companies?  Today, I will share some thoughts on this subject that reflect my individual views as a Commissioner of the SEC and do not necessarily reflect the views of the full Commission or my fellow Commissioners.

Disclosure by Foreign Companies

The underlying regulatory philosophy of the federal securities laws is truthful disclosure. In recommending legislation for securities laws to Congress, President Roosevelt stated: “[The legislation] puts the burden of telling the whole truth on the seller…The purpose of the legislation…is to protect the public with the least possible interference to honest business.”

As the SEC has recognized, foreign companies are different from U.S companies and, accordingly, may bear greater costs to comply with the same disclosure requirements.  Thus, a fundamental issue in the SEC’s regulation of foreign companies is whether, and to what extent, the substance and frequency of disclosure by foreign companies should differ from that of U.S. companies.  At one end of the spectrum, foreign companies would be subject to the exact same disclosure requirements as U.S. companies, with limited exceptions for when following such requirements would violate foreign laws.  At the other end, foreign companies would provide only the disclosure required under their home country’s requirements.

In addressing this topic today, I will focus on disclosure outside of the financial statements. In considering what the SEC’s regulatory philosophy for non-financial disclosure should be in the future, it is important to understand the history of the agency’s regulatory approach.  I will first discuss the frequency with which foreign companies must provide disclosure, followed by the substance of the disclosure.

Frequency of Disclosure by Foreign Companies

Since 1935, both U.S. and foreign companies have been required to file an annual report with the SEC. Today, this report for foreign companies is referred to as Form 20-F.  Beginning in 1967, foreign companies have been required to furnish a report, referred to as 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 U.S. 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.

For decades, this regulatory approach provided a strong distinction in the reporting frequency between U.S. and foreign companies.  However, this approach has begun to change. In 2012, the SEC introduced a new annual filing regarding companies’ use of conflict minerals that equally applied to U.S and foreign companies. In 2020, the SEC implemented an annual filing requirement regarding payments made by U.S. and foreign companies engaged in resource extraction. Finally, last year, the SEC issued a rule to require U.S. and foreign companies to provide quarterly disclosure regarding repurchases of the company’s own equity securities.

Although the conflict minerals and resource extraction rules were required by Congress, the SEC could have, but decided against using its exemptive authority to exclude foreign companies from the filing requirement.  In contrast, the share repurchase rule was not mandated by Congress.  Its application to foreign companies represented a significant departure from the SEC’s past practice.  Ultimately, a court vacated the rule late last year because of procedural violations by the SEC when adopting the rule, and the unprecedented quarterly filing by foreign companies for share repurchases will not occur.  Nonetheless, the SEC’s decisions with respect to its conflict minerals, resource extraction, and share repurchases rules are departures from the agency’s long-standing position in requiring disclosure by foreign companies annually on Form 20-F and when material information is otherwise made public pursuant to Form 6-K.

Substance of Disclosure by Foreign Companies

Turning to the substance of the disclosure requirements for foreign companies, we begin in 1979 – the year in which the SEC introduced Form 20-F.  In adopting the new form, the agency stated that “[U.S.] investors in foreign securities should be supplied with information equal as nearly as possible and practicable to that provided to investors in securities of domestic issuers.” However, the SEC also recognized that “there are differences in various national laws and businesses and accounting customs which the [SEC] should take into account when assessing disclosure requirements for foreign [companies].” In balancing these two considerations, the agency adopted annual disclosure requirements for foreign companies that were based on the requirements for U.S. companies, but did not make the requirements “substantially similar,” as was proposed.

The next comprehensive update to Form 20-F was in 1999. That year, the agency revised the annual report’s disclosure requirements to conform to the international disclosure standards endorsed by the International Organization of Securities Commissions (“IOSCO”).  In explaining its rationale for changing Form 20-F’s disclosure requirements to match IOSCO’s standards, the SEC explained that “issuers would find it easier to offer or list securities outside their home country by preparing a core disclosure document that, with a minimum of national tailoring, may be accepted in multiple jurisdictions [and that] [t]his disclosure document would serve as an ‘international passport’ to the world’s capital markets by reducing the barriers to cross-border offerings and listings.” The SEC also reiterated striking a balance between “expanding the investment opportunities available to U.S. investors” and “ensuring that [investors] receive a high level of information comparable to that provided by U.S. companies.”

Since 1999, changes to the disclosure requirements for foreign companies have largely been piecemeal.  These changes generally fall into three categories.  First, for disclosure mandated by Congress – particularly from the Sarbanes-Oxley Act and the Dodd-Frank Act – the SEC has been reluctant to exercise its general exemptive authority and instead, has chosen to apply disclosure requirements equally to U.S. and foreign companies. Second, where the SEC has exempted foreign companies from disclosure obligations, the requirement is part of the proxy statement, which does not apply to foreign companies, or relates to executive compensation. Third, in recent disclosure rulemakings that were not mandated by Congress and that do not relate to proxy materials, the SEC has generally required the same disclosure from U.S. and foreign companies alike. In explaining its decisions, the SEC stated 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.”

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