[Federal Register Volume 90, Number 109 (Monday, June 9, 2025)]
[Proposed Rules]
[Pages 24232-24256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-10428]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 239, 240, and 249
[Release Nos. 33-11376; 34-103176; File No. S7-2025-01]
RIN 3235-AN35
Concept Release on Foreign Private Issuer Eligibility
AGENCY: Securities and Exchange Commission.
ACTION: Concept release; request for comments.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
publishing this concept release to solicit comments on the definition
of a foreign private issuer (``FPI''). There have been several
developments within the FPI population since the Commission last
conducted a broad review of reporting FPIs and the eligibility criteria
for FPI status. These developments have prompted us to consider whether
the current FPI definition should be revised so that it better
represents the issuers that the Commission intended to benefit from
current FPI accommodations while continuing to protect investors and
promote capital formation.
DATES: Comments should be received on or before September 8, 2025.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
Send an email to [email protected]. Please include
File Number S7-2025-01 on the subject line.
Paper Comments
Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-2025-01. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method of submission. The Commission will post all
comments on the Commission's website (https://www.sec.gov/rules/proposed.shtml). All comments received will be posted without change.
Comments are also available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Operating conditions may limit access to the Commission's Public
Reference Room. Do not include personally identifiable information in
submissions; you should submit only information that you wish to make
available publicly. The Commission may redact in part or withhold
entirely from publication submitted material that is obscene or subject
to copyright protection.
FOR FURTHER INFORMATION CONTACT: Kelsey Glover, Special Counsel, or
Kateryna Kuntsevich, Special Counsel, in the Office of International
Corporate Finance, Division of Corporation Finance, at (202) 551-3450,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549.
SUPPLEMENTARY INFORMATION:
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Table of Contents
I. Introduction
II. The Current FPI Definition and Regulatory Accommodations
A. History of the FPI Definition and Regulatory Framework
B. Summary of Current FPI Accommodations
III. Recent Developments in the FPI Population
A. FPI Population Overview
B. FPI Jurisdictions of Incorporation and Headquarters
C. FPI Reliance on U.S. Capital Markets
1. U.S. Percentage of Global Trading
2. FPIs Trading Almost Exclusively in U.S. Capital Markets
IV. Reassessment of the FPI Definition
A. Background
B. Potential Regulatory Responses
1. Update the Existing FPI Eligibility Criteria Request for
Comment
2. Foreign Trading Volume Requirement Request for Comment
3. Major Foreign Exchange Listing Requirement Request for
Comment
4. Commission Assessment of Foreign Regulation Request for
Comment
5. Mutual Recognition Systems Request for Comment
6. International Cooperation Arrangement Requirement Request for
Comment
C. Other Considerations Request for Comment
V. Regulatory Planning and Review
VI. Conclusion
I. Introduction
The Commission has long recognized that foreign issuers \1\ face
unique challenges in accessing U.S. capital markets and over the years
has sought to provide such issuers with regulatory flexibilities \2\
that preserve access for U.S. investors to such issuers' securities
while maintaining appropriate investor protections. Foreign issuers
that qualify for FPI status \3\ under the Federal securities laws
benefit from accommodations that provide full or partial relief from
requirements for domestic issuers. When the Commission adopted the
regulatory framework governing FPIs, it did so with a recognition that
foreign issuers were subject to different circumstances than domestic
issuers due to the laws and practices imposed by their home country
jurisdictions and, as a result, certain accommodations were necessary,
and that FPIs' securities would be traded in foreign markets.\4\
Updates to the FPI accommodations since their adoption have reflected
an 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\
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\1\ See infra section II.A for the definition of a ``foreign
issuer.''
\2\ See Release No. 34-323 (July 15, 1935) (``An endeavor has
been made to adapt the requirements for domestic issuers to the
peculiar circumstances of foreign issuers. In view of the disparity
between the laws and practices existing in the several countries it
was necessary to introduce great flexibility in the
requirements.''), Release No. 34-324 (July 15, 1935), Release No.
34-325 (July 15, 1935), and Release No. 34-412 (Nov. 6, 1935)
(together, the ``1935 Releases''); Registration of Foreign
Securities, Release No. 34-7746 (Nov. 16, 1965) [30 FR 14737 (Nov.
27, 1965)] (describing an in-depth study of foreign regulatory
requirements that the Commission undertook prior to adopting various
foreign issuer accommodations, including an assessment of the extent
of the trading market for foreign securities in the United States,
the disclosure and reporting requirements and practices in many of
the countries whose issuers have securities traded in the United
States, the requirements of many leading foreign stock exchanges,
and the nature of the information presently furnished to the
Commission and noting that ``the Commission will continue to observe
developments in foreign disclosure practices to determine whether
the proposed rules and forms should be modified in the future'');
Rules, Registration and Annual Report Form for Foreign Private
Issuers, Release No. 34-16371 (Nov. 29, 1979) [44 FR 70132 (Dec. 6,
1979)] (``Form 20-F Adopting Release'') (``[T]he Commission
recognizes that there are differences in various national laws and
businesses and accounting customs which the Commission should take
into account when assessing disclosure requirements for foreign
issuers.''); Foreign Issuer Reporting Enhancements, Release No. 33-
8900 (Feb. 29, 2008) [73 FR 13403, 13405 (Mar. 12, 2008)] (``[W]e
acknowledged that differences in the national laws and accounting
regulations applicable to foreign private issuers should be
considered when establishing disclosure requirements for foreign
private issuers. . . . Foreign private issuers are subject to
different legal and regulatory requirements in their home
jurisdictions, and as a result frequently follow different corporate
governance practices from domestic companies.'').
\3\ A ``foreign private issuer'' is a foreign issuer other than
a foreign government, except for an issuer that as of the last
business day of its most recently completed second fiscal quarter
has more than 50% of its outstanding voting securities directly or
indirectly held of record by U.S. residents and meets any of the
following: a majority of its executive officers or directors are
citizens or residents of the United States, more than 50% of its
assets are located in the United States, or its business is
principally administered in the United States. 17 CFR 230.405; 17
CFR 240.3b-4.
\4\ See Release No. 34-323, supra note 2; Release No. 34-412,
supra note 2 (concerning foreign issuer exemptions from reporting
requirements under 15 U.S.C. 78p (``section 16'') of the Exchange
Act, the Commission noted that ``comparatively few foreign
corporations have stock listed on American exchanges, and even in
such cases the principal market is rarely in this country.'').
\5\ See, e.g., supra note 2; Adoption of Rules Relating to
Foreign Securities, Release No. 34-8066 (Apr. 28, 1967) [32 FR 7845
(May 30, 1967)] (``[T]o assure that American investors would have
available adequate information about [foreign] issuers, the
Commission made an extensive study of the disclosure and reporting
requirements and practices in many of the countries whose issuers
have securities traded in the United States, and the requirements of
many leading foreign stock exchanges . . . the Commission noted the
improvement in the reporting of financial information by foreign
issuers, resulting from changes in foreign corporate laws, stock
exchange requirements, and voluntary disclosure by the companies
themselves.'').
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A recent broad review by the Commission staff of FPIs that are
subject to reporting obligations under 15 U.S.C. 78m(a) (``section
13(a)'') or 15 U.S.C. 78o(d) (``section 15(d)'') of the Securities
Exchange Act of 1934 (the ``Exchange Act'') \6\ shows significant
changes in that population since 2003.\7\ In particular, the
composition of home country jurisdictions of FPIs that file annual
reports on Form 20-F (``20-F FPIs'') has shifted dramatically in recent
decades. The home country jurisdictions represented by current FPIs
that file annual reports on either Form 20-F or Form 40-F \8\
(``reporting FPIs'') \9\ have varying levels of disclosure
requirements, including some that rely on the FPI regulatory framework
in the United States to be the primary set of regulations governing
their issuers.\10\ Additionally, the majority of 20-F FPIs today have
their equity securities almost exclusively traded in U.S. capital
markets.\11\ Because the FPI population has changed such that it may no
longer reflect the issuers that the Commission intended to benefit from
current FPI accommodations, we are soliciting comments on whether the
current FPI definition should be amended.
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\6\ 15 U.S.C. 78a et seq.
\7\ See infra section III for further discussion. See also Evan
Avila and Mattias Nilsson, Trends in the Foreign Private Issuer
Population 2003-2023: A Descriptive Analysis of Issuers Filing
Annual Reports on Form 20-F (Dec. 2024) (the ``FPI Trends White
Paper''), available at https://www.sec.gov/files/dera_wp_fpi-trends-2412.pdf). The data used and analysis provided by the Commission
staff in this release are consistent with the data used and analysis
provided in the FPI Trends White Paper.
\8\ Form 40-F is filed by Canadian issuers that are eligible for
and elect to take advantage of the Multijurisdictional Disclosure
System (``MJDS''). Under the MJDS, eligible Canadian issuers may
satisfy certain securities registration and reporting requirements
of the Commission by providing disclosure documents prepared in
accordance with the requirements of Canadian securities regulatory
authorities. See Multijurisdictional Disclosure and Modifications to
the Current Registration and Reporting System for Canadian Issuers,
Release No. 33-6902 (June 21, 1991) [56 FR 30036 (July 1, 1991)]
(``MJDS Adopting Release'').
\9\ Some FPIs voluntarily file their annual reports on Form 10-K
instead of Form 20-F or Form 40-F. Those FPIs may take advantage of
some, but not all, of the FPI accommodations. See infra section II.B
for more information about the FPI accommodations.
\10\ See infra section IV.A for further discussion.
\11\ See infra sections III and IV.A for further discussion.
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We begin this concept release with an overview of the FPI
definition and regulatory framework. We then outline some of the recent
changes that have been observed in the FPI population. We next discuss
potential concerns these developments raise and solicit comments on
whether and how the
[[Page 24234]]
current FPI definition might be revised to address those concerns.\12\
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\12\ The FPI definition was last amended in 1999. See supra note
3 and infra section II.A for more detail.
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While we pose a number of general and specific questions throughout
this release, we also welcome comments on any other aspects of the
current FPI definition or our review of the FPI population discussed in
this release, and we particularly welcome comments and data on any
costs, burdens, or benefits that may result from possible regulatory
responses identified in this release or otherwise proposed by
commenters. Interested persons are also invited to comment on whether
alternative approaches, or a combination of approaches, would better
address any potential concerns associated with the current FPI
definition.
II. The Current FPI Definition and Regulatory Accommodations
A. History of the FPI Definition and Regulatory Framework
The Commission established the initial regulatory framework for
foreign issuers in 1935.\13\ That framework has continued to evolve in
order to preserve appropriate investor protections while addressing
FPIs' needs for certain accommodations from the Commission's rules to
reduce burdens on those issuers arising from duplicative or conflicting
domestic and foreign disclosure requirements.\14\ The initial
regulatory framework did not include a definition for FPIs and instead
applied to (1) a national of a foreign country other than a North
American country or Cuba, (2) a national of a North American country or
Cuba whose securities were guaranteed by any foreign government (only
for the permanent registration of bonds or other evidence of
indebtedness), or (3) any corporation or unincorporated association,
foreign or domestic, which is directly or indirectly owned or
controlled by any foreign government.\15\ The 1935 Releases also
included a broad reference to foreign issuers in the context of
exempting them from section 16 beneficial ownership reporting
requirements,\16\ but did not adopt a specific definition of a
``foreign issuer.'' \17\
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\13\ See the 1935 Releases, supra note 2.
\14\ See supra note 2; supra note 5.
\15\ See the 1935 Releases, supra note 2.
\16\ Section 16 generally requires, among other things, that
specified officers, directors and principal security holders of an
issuer with a class of equity securities registered under 15 U.S.C.
78l (``section 12'') of the Exchange Act report initial beneficial
ownership and changes in ownership of certain issuer securities and
subjects them to disgorgement of profit realized from transactions
in these securities that occur within a period of less than six
months.
\17\ See the 1935 Releases, supra note 2.
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The Commission established the foundation of the current FPI
definition in 1983 when it adopted a bifurcated test to determine
whether a foreign issuer is an ``essentially U.S. issuer'' depending
upon its percentage of U.S. ownership and the location of its business
operations.\18\ The Commission adopted further amendments in 1999 to
base the U.S. ownership portion of the definition more closely on the
percentage of securities beneficially owned by U.S. residents, rather
than record ownership.\19\ The current definitions of ``foreign
issuer'' and ``foreign private issuer'' are contained in 17 CFR 230.405
(``Rule 405'') of the Securities Act of 1933 (the ``Securities Act'')
\20\ and 17 CFR 240.3b-4 (``Rule 3b-4'') of the Exchange Act.
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\18\ Foreign Securities, Release No. 33-6493 (Oct. 6, 1983) [48
FR 46736 (Oct. 14, 1983)] (``1983 Release'').
\19\ International Disclosure Standards, Release No. 33-7745
(Sept. 28, 1999) [64 FR 53900 (Oct. 5, 1999)] (``1999 International
Disclosure Standards Release''). The 1999 amendments, in effect,
changed the test of whether more than 50% of an issuer's outstanding
voting securities are held by residents of the United States from a
record ownership test to one that more closely reflects the
beneficial ownership of the issuer's securities.
\20\ 15 U.S.C. 77a et seq.
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A ``foreign issuer'' is any issuer which is a foreign government, a
national of any foreign country, or a corporation or other organization
incorporated or organized under the laws of any foreign country.\21\ A
foreign issuer that has 50 percent or less of its outstanding voting
securities held of record directly or indirectly by U.S. residents
would qualify for FPI status under the ``shareholder test.'' A foreign
issuer with more than 50 percent of its outstanding voting securities
held by U.S. residents would qualify for FPI status under the
``business contacts test'' if it has none of the following contacts
with the United States: (1) a majority of its executive officers or
directors are U.S. citizens or residents; (2) more than 50 percent of
its assets are located in the United States; or (3) its business is
administered principally in the United States.\22\ For a reporting
issuer,\23\ FPI eligibility is determined annually as of the end of a
foreign issuer's second fiscal quarter. A foreign issuer filing an
initial registration statement under the Securities Act or Exchange Act
determines its FPI status as of a date within 30 days prior to
filing.\24\
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\21\ 17 CFR 230.405; 17 CFR 240.3b-4.
\22\ Id.
\23\ As used in this release, the term ``reporting issuer''
refers to any issuer that is subject to Exchange Act section 13(a)
or 15(d) reporting obligations. See supra section I for the
definition of a ``reporting FPI.''
\24\ 17 CFR 230.405; 17 CFR 240.3b-4.
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The Commission has sought to balance the information needs of U.S.
investors with a recognition of the benefit to those investors of
having opportunities for investment in foreign securities \25\--a
benefit that could be diminished without accommodations that take into
account the disclosure requirements, accounting standards, and other
regulatory and legal requirements that the FPI is subject to in its
home country.\26\ At the time the current FPI accommodations were
adopted, the Commission's understanding was that most eligible FPIs
would be subject to meaningful disclosure and other regulatory
requirements in their home country jurisdictions, and that FPIs'
securities would be traded in foreign markets.\27\ As global markets
evolve, the Commission periodically assesses whether the FPI regulatory
framework continues to appropriately serve U.S. investors and U.S.
capital markets, with its most recent broad review of the framework
conducted in 2008.\28\
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\25\ 1999 International Disclosure Standards Release, supra note
19, at 53901 (``[W]e historically have sought to balance the
information needs of investors with the public interest served by
opportunities to invest in a variety of securities, including
foreign securities.'').
\26\ See supra note 2.
\27\ See supra note 4; supra note 5.
\28\ See Form 20-F Adopting Release, supra note 2; Foreign
Issuer Reporting Enhancements, Release No. 33-8959 (Sept. 23, 2008)
[73 FR 58300 (Oct. 6, 2008)].
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B. Summary of Current FPI Accommodations
Over the years, the Commission has implemented a number of specific
accommodations from which eligible FPIs may currently benefit as
compared to domestic issuers, including, for example, the following:
20-F FPIs have until four months after the fiscal year-end
to file annual reports on Form 20-F,\29\ whereas annual reports on Form
10-K must be filed within 60, 75, or 90 days after the fiscal year-
end.\30\
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\29\ General Instruction A.(b) to Form 20-F. Canadian FPIs that
file annual reports on Form 40-F under the MJDS (``MJDS issuers'')
must file their reports ``on the same day the information included
therein is due to be filed with any securities commission or
equivalent regulatory authority in Canada.'' See General Instruction
D.(3) to Form 40-F.
\30\ General Instruction A.(2) to Form 10-K.
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Reporting FPIs are not required to file quarterly reports,
whereas domestic issuers must file quarterly reports on Form 10-Q.\31\
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\31\ 17 CFR 240.13a-13.
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FPIs may present their financial statements using (1)
International
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Financial Reporting Standards (``IFRS'') as issued by the International
Accounting Standards Board (``IASB''), (2) generally accepted
accounting principles in the United States (``U.S. GAAP''), or (3) a
comprehensive set of accounting principles other than U.S. GAAP and
IFRS as issued by the IASB (``home country GAAP'') with a
reconciliation to U.S. GAAP, whereas domestic issuers are required to
use U.S. GAAP.\32\
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\32\ 17 CFR 210.4-01(a); Item 17(c) of Form 20-F. FPIs
presenting their financial statements in accordance with IFRS as
issued by the IASB do not need to provide a reconciliation to U.S.
GAAP. However, the use of IFRS not as issued by the IASB is
considered equivalent to home country GAAP and must be reconciled to
U.S. GAAP.
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FPIs are exempt from obligations under section 16.\33\
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\33\ 17 CFR 240.3a12-3(b). See supra note 16; 15 U.S.C. 78p.
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FPIs are exempt from proxy requirements that apply to
domestic issuers and that specify procedures and required documentation
for soliciting shareholder votes.\34\
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\34\ 17 CFR 240.3a12-3(b); Regulation 14A (17 CFR 240.14a-1
through 240.14b-2). FPIs also are not subject to information
statement requirements. See Regulation 14C (17 CFR 240.14c-1 through
240.14c-101).
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FPIs are exempt from say-on-pay rules that require
domestic issuers to periodically enable shareholders to make certain
advisory votes.\35\
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\35\ 17 CFR 240.3a12-3(b). See Shareholder Approval of Executive
Compensation and Golden Parachute Compensation, Release No. 33-9178
(Jan. 25, 2011) [76 FR 6010 (Feb. 2, 2011)], for more information
about the say-on-pay and frequency rules that apply to domestic
issuers.
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Reporting FPIs furnish current reports on Form 6-K
promptly after the information in the report is made public \36\ rather
than file or furnish current reports on Form 8-K, either within four
business days after occurrence of the event or as otherwise specified
in Form 8-K, as domestic issuers are required to do.\37\ The current
Form 6-K requirements for reporting FPIs are limited to the disclosures
that a reporting FPI already (1) makes or is required to make public
pursuant to the law of the jurisdiction of its domicile or in which it
is incorporated or organized, (2) files or is required to file with a
stock exchange on which its securities are traded and that were made
public by that exchange, or (3) distributes or is required to
distribute to its security holders.\38\
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\36\ 17 CFR 240.13a-16; 17 CFR 240.15d-16.
\37\ 17 CFR 240.13a-11; 17 CFR 240.15d-11.
\38\ General Instruction A to Form 6-K.
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Interim financial statements included in a registration
statement are not required to be updated as soon for FPIs as for
domestic issuers. The registration statement of an FPI dated more than
nine months after the end of the last audited financial year requires
consolidated interim financial statements, which may be unaudited,
covering at least the first six months of the subsequent financial
year.\39\ In contrast, a registration statement of a domestic issuer
generally requires interim financial statements dated no more than 134
days \40\ before the effective date of a registration statement.\41\
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\39\ Item 8.A.5 of Form 20-F.
\40\ For large accelerated filers and accelerated filers, a
registration statement requires financial statements dated no more
than 129 days before the effective date of a registration statement.
17 CFR 210.3-12; 17 CFR 210.8-08.
\41\ The requirements for the age of annual financial statements
of FPIs and domestic issuers are more similar than those for interim
financial statements. For an FPI, a registration statement may
become effective with audited annual financial statements as old as
15 months, except in certain circumstances. Item 8.A.4. of Form 20-
F. For a domestic issuer, a registration statement may become
effective with audited annual financial statements as old as one
year and 45 days to 90 days, depending on certain circumstances. 17
CFR 210.3-12.
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Certifications mandated by the Sarbanes-Oxley Act of 2002
\42\ are only required from reporting FPIs in their annual filings,
whereas domestic issuers must also include such certifications on a
quarterly basis.\43\
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\42\ 15 U.S.C. 7214 (as amended by Pub. L. 116-222).
\43\ 17 CFR 240.3a-14; 17 CFR 240.15d-14; Certification of
Disclosure in Companies' Quarterly and Annual Reports, Release No.
33-8124 (Aug. 29, 2002) [67 FR 57276 (Sept. 9, 2002)].
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FPIs are not subject to Regulation Fair Disclosure,\44\
which addresses the selective disclosure of material nonpublic
information.\45\
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\44\ 17 CFR 243.101(b).
\45\ 17 CFR part 243. Regulation Fair Disclosure aims to prevent
selective disclosure of material nonpublic information to market
professionals and certain shareholders by requiring domestic issuers
to disclose such information to the public simultaneously or
promptly.
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Non-GAAP financial measures disclosed by FPIs are exempt
from compliance with Regulation G \46\ if certain conditions are
met.\47\
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\46\ 17 CFR part 244.
\47\ 17 CFR 244.100(c). Regulation G does not apply to a non-
GAAP financial measure disclosed by FPIs whose securities are listed
or quoted on a securities exchange or inter-dealer quotation system
outside the United States provided that the non-GAAP financial
measure is not derived from or based on a measure calculated and
presented in accordance with U.S. GAAP, and the disclosure is made
by or on behalf of the FPI outside the United States, or is included
in a written communication that is released by or on behalf of the
registrant outside the United States.
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Non-GAAP financial measures disclosed by FPIs that would
otherwise be prohibited under 17 CFR 229.10(e)(1)(ii) are permitted in
a filing if certain conditions are met.\48\
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\48\ Note to paragraph (e) of 17 CFR 229.10. To be permitted in
a filing of an FPI, such non-GAAP financial measures must relate to
the generally accepted accounting principles (``GAAP'') used in the
registrant's primary financial statements included in its filing
with the Commission, be required or expressly permitted by the
standard-setter that is responsible for establishing the GAAP used
in the registrant's primary financial statements, and be included in
the annual report prepared by the registrant for use in the
jurisdiction in which it is domiciled, incorporated, or organized or
for distribution to its security holders.
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FPIs are exempt from compliance with Regulation Blackout
Trading Restriction if certain conditions are met.\49\
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\49\ 17 CFR part 245. Regulation Blackout Trading Restriction is
a set of rules adopted pursuant to the Sarbanes-Oxley Act. It
relates to restrictions on insider trades during pension fund
blackout periods and applies to the directors and officers of FPIs
where 50% or more of the participants or beneficiaries located in
the United States in individual account plans maintained by the FPI
are subject to a temporary trading suspension in the FPI's equity
securities, and the affected participants and beneficiaries
represent an appreciable portion of the FPI's worldwide employees.
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The disclosure requirements for annual reports filed by
reporting FPIs differ from the requirements for annual reports filed by
domestic issuers.\50\ In regard to 20-F FPIs, some of these differences
include:
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\50\ The requirements for FPI annual reports on Form 20-F were
revised in 1999 to conform to the international disclosure standards
endorsed by the International Organization of Securities Commissions
(``IOSCO'') in Sept. 1998. See International Disclosure Standards,
Release No. 33-7637 (Sept. 28, 1999) [64 FR 61962 (Nov. 15, 1999)].
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Distinct disclosure requirements pertaining to
descriptions of the issuer's business, material developments, legal
proceedings, liquidity and capital resources, and results of
operations; \51\
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\51\ These distinctions may not result in actual differences in
issuer disclosure. For example, 17 CFR 229.101 requires domestic
issuers to disclose ``information material to an understanding of
the general development of the business'' while Item 4.A.4 of Form
20-F requires disclosure regarding ``important events in the
development of the company's business.'' As another example, when
disclosing legal proceedings, domestic issuers are required to
provide specific details as set forth in 17 CFR 229.103 including
the name of the court or agency in which the proceedings are
pending, the date instituted, the principal parties, a description
of the factual basis alleged to underlie the proceedings, and the
relief sought, whereas 20-F FPIs are subject to a more general
requirement to ``provide information'' pertaining to legal
proceedings under Item 8.A.7 of Form 20-F.
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No specific requirement that 20-F FPIs disclose material
changes to board nomination procedures or recent sales of unregistered
securities;
Absent a separate disclosure requirement in the FPI's home
country, 20-F FPIs are not required to disclose the age or date of
birth of directors, or make certain executive compensation disclosures
including individualized executive compensation details; and
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Only the 20-F FPI registrant is required to sign the
annual report, whereas domestic annual reports must be signed by the
registrant, principal executive officer, principal financial officer,
principal accounting officer, and a majority of the board.
FPIs may file Securities Act registration statements on
Forms F-1, F-3, and F-4,\52\ which differ in structure and disclosure
requirements from the corresponding Forms S-1, S-3, and S-4 \53\ used
by domestic issuers to register securities offerings.
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\52\ 17 CFR 239.31; 17 CFR 239.33; 17 CFR 239.34.
\53\ 17 CFR 239.11; 17 CFR 239.13; 17 CFR 239.25.
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FPIs may register securities on Form 20-F,\54\ which
differs in structure and disclosure requirements from the corresponding
Form 10 \55\ used by domestic issuers, pursuant to section 12(b) or (g)
of the Exchange Act.\56\
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\54\ 17 CFR 249.220f.
\55\ 17 CFR 249.210.
\56\ See General Instruction A.(a) to Form 20-F. MJDS issuers
may also register securities on Form 40-F pursuant to section 12 of
the Exchange Act. See General Instruction A.(2) to Form 40-F; MJDS
Adopting Release supra note 8.
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An FPI is exempt from section 12(g) registration \57\ if
either, pursuant to Rule 12g3-2(a),\58\ it has fewer than 300
recordholders that are resident in the United States as of its most
recent fiscal year-end, or, pursuant to Rule 12g3-2(b),\59\ the issuer
satisfies foreign listing and electronic publishing conditions and does
not register a class of securities under section 12 or incur a section
15(d) reporting obligation.
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\57\ 15 U.S.C. 78l(g). Section 12(g) sets forth the registration
requirements for securities under the Exchange Act. An issuer that
is not a bank or bank holding company must register a class of
equity securities (other than exempted securities) within 120 days
after its fiscal year-end if, on the last day of its fiscal year,
the issuer has total assets of more than $10 million and the class
of equity securities is ``held of record'' by either 2,000 persons,
or 500 persons who are not accredited investors. Different
registration thresholds apply for banks and bank holding companies.
\58\ 17 CFR 240.12g3-2(a).
\59\ 17 CFR 240.12g3-2(b).
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FPIs may rely upon an exclusion from Securities Act
registration for certain offerings and sales of securities that occur
outside the United States, including a related safe harbor under 17 CFR
230.135e pertaining to press conferences and press releases issued in
connection with such offerings.\60\
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\60\ 17 CFR 230.903; 17 CFR 230.904; 17 CFR 230.135e.
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An FPI can terminate its section 12(g) registration if its
U.S. trading volume falls below a certain level, or if the FPI has
fewer than 300 recordholders resident in the United States,\61\ whereas
a domestic issuer typically may only terminate its section 12(g)
registration if it has fewer than 300 recordholders of such class of
securities.\62\
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\61\ 17 CFR 240.12h-6 (``Rule 12h-6'').
\62\ 17 CFR 240.12g-4. A domestic issuer with total assets that
have not exceeded $10 million on the last day of each of the
issuer's most recent three fiscal years may terminate registration
of a class of securities with fewer than 500 recordholders.
---------------------------------------------------------------------------
An FPI can terminate its section 15(d) reporting
obligations, whereas domestic issuers may only suspend their duty to
file reports under section 15(d).\63\
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\63\ Rule 12h-6, supra note 61; 17 CFR 240.12h-3. Following
suspension of a duty to file reports under section 15(d), if the
number of recordholders for a class of securities of a domestic
issuer increases above the 300- or 500-person threshold (as
applicable), such issuer must resume periodic reporting. An FPI that
has terminated its duty to file reports pursuant to Rule 12h-6 will
not be required to resume periodic reporting absent a new
registration.
---------------------------------------------------------------------------
Additionally, only a limited subset of FPIs is required to appoint
an agent and formally consent to service of process.\64\
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\64\ See 17 CFR 249.250; 17 CFR 239.42 (``Form F-X''). Form F-X
is required to be filed by certain foreign issuers to appoint an
agent for service of process, including MJDS issuers, foreign
issuers filing certain tender offer documents, and foreign issuers
filing Form CB in connection with a tender offer, rights offering,
or business combination. See supra note 8, supra note 29 and section
IV.B.5 for more information regarding the MJDS. Formal appointment
of an agent and consent to service of process is unnecessary for
most actions involving domestic issuers, whereas foreign legal
barriers including blocking statutes, data privacy laws and other
laws in foreign jurisdictions can present unique challenges for
regulatory authorities in enforcement cases against FPIs.
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III. Recent Developments in the FPI Population
The staff recently conducted a broad review of reporting FPIs. The
review focused primarily on 20-F FPIs from fiscal year 2003 through
fiscal year 2023.\65\ The staff examined issuers' jurisdictions of
incorporation and headquarters, global market capitalizations, trading
volumes, and other characteristics for the subsets of such issuers for
which such data was available. In section III.A, we present the staff's
findings on how the total number of reporting FPIs changed from 2003 to
2023. In section III.B, we present the staff's findings on changes in
the distribution of 20-F FPIs' jurisdictions of incorporation and
headquarters since 2003, which demonstrate that 20-F FPIs now represent
a different composition of home country jurisdictions that have varying
levels of disclosure requirements. Finally, in section III.C, we
present the staff's review of 20-F FPIs' equity trading markets. In
particular, the staff observed that the majority of 20-F FPIs today
have their equity securities almost exclusively traded in U.S. capital
markets.\66\ Across these analyses, the staff also observed that the
documented trends are driven by 20-F FPIs with relatively small market
capitalizations. Accordingly, the 20-F FPIs driving the trends
identified by the staff represent a relatively smaller percentage of
the overall population of 20-F FPIs in terms of aggregate global market
capitalization than in terms of absolute numbers.
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\65\ The earliest filings included in the staff's review are
from fiscal year 2003 because this is the first year for which Forms
20-F are consistently available from the Commission's Electronic
Data Gathering, Analysis, and Retrieval (``EDGAR'') system for all
20-F FPIs. Prior to 2002, FPIs filed paper copies of their Forms 20-
F, which are not as readily analyzed using automated techniques.
\66\ By ``almost exclusively traded in U.S. capital markets,''
we are referring to 20-F FPIs that have had less than 1% of their
equity security trading volume outside U.S. capital markets (or
equivalently 99% or more of such volume in U.S. capital markets) in
a 12-month period centered around their fiscal year-end dates, which
for fiscal year 2023 included almost 55% of all 20-F FPIs. See
section III.C below for details on this analysis.
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A. FPI Population Overview 67
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\67\ This section is based on data and analysis contained in
section 3 of the FPI Trends White Paper.
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The staff found that 967 FPIs filed annual reports on Form 20-F
covering fiscal year 2023,\68\ whereas 146 FPIs filed on Form 40-F
under MJDS for fiscal year 2023.\69\ To provide insight into how the
size of the reporting FPI population has shifted over time, Figure 1
below shows the number of reporting FPIs each year by their type of
annual filing (Form 20-F or Form 40-F) from fiscal year 2003 through
fiscal year 2023.\70\ As shown in Figure 1, the number of 20-F FPIs has
followed a U-shaped trend over this period. After initially rising
slightly from 937 to 950 issuers in fiscal year 2004, the number of
issuers exhibited a clear downward trend until reaching its lowest
point of 656 issuers in fiscal year 2016, after which the number of 20-
F FPIs steadily increased to 967 issuers by fiscal year 2023. By
contrast, the count of issuers reporting on Form 40-F (i.e., MJDS
[[Page 24237]]
issuers) \71\ fluctuates throughout the period without any discernible
trend.
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\68\ For this analysis, the staff followed the convention of
assigning a given fiscal year to any issuer's annual report with a
fiscal year-end between June 1st of that calendar year through May
30th of the following calendar year.
\69\ These numbers are estimated as the number of unique
registrants, identified by Central Index Key (``CIK''), that filed
either a Form 20-F or Form 40-F with financial statements pertaining
to fiscal year 2023. We note that the analysis in this section does
not include registered FPIs electing to file on Form 10-K.
\70\ For each fiscal year, the staff counted the number of
unique FPIs, identified by CIK, filing an annual report either on
Form 20-F or Form 40-F pertaining to that fiscal year.
\71\ See supra note 8 and supra note 29 for more information
regarding the MJDS.
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Figure 1. Reporting FPI Counts by Type of Annual Filing, Fiscal Years
(``FYs'') 2003-2023
[GRAPHIC] [TIFF OMITTED] TP09JN25.000
In the analysis that follows, the staff focused on 20-F FPIs, as
this subpopulation of FPIs is the subject of the considerations
regarding the current FPI definition discussed in this release. In
particular, the staff excluded MJDS issuers because the Commission had
previously compared Canadian securities regulations to U.S. regulations
in adopting the MJDS and determined, at that time, that permitting
certain Canadian issuers to register securities under the MJDS using
their home country jurisdiction disclosure documents was in the
``public interest and fully adequate for the protection of U.S.
investors.'' \72\ Since then, the Commission has continued to monitor
the operation of the MJDS, including any changes to law and policy that
may necessitate updates to the MJDS requirements. The staff also
excluded (1) FPIs electing to file on domestic forms (e.g., filing
their annual reports on Form 10-K) because they are already restricted
from taking advantage of a number of the FPI accommodations \73\ and
(2) FPIs that are not subject to reporting obligations under section
13(a) or section 15(d) of the Exchange Act.\74\ As a measure of the
economic significance of the 20-F FPI population, the aggregate market
capitalization for these issuers as of fiscal year 2023 was
approximately $9 trillion, the mean market capitalization per issuer
was approximately $9.5 billion, and the median market capitalization
per issuer was approximately $256 million.\75\
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\72\ MJDS Adopting Release, supra note 8. The Commission is not
soliciting comment on changes to MJDS in this release.
\73\ There is a comparatively small number of FPIs electing to
file on Form 10-K any given year. For example, using a textual
search of all Forms 10-K filed in calendar year 2023, the staff
identified only nine such FPIs. See supra section II.B for a summary
of the current accommodations for FPIs. FPIs filing on domestic
forms would not be eligible to take advantage of the accommodations
specific to reporting FPIs.
\74\ For example, some FPIs may trade American Depositary
Receipts (``ADRs'') on the U.S. over-the-counter (``OTC'') markets
in reliance on Rule 12g3-2(b). See supra note 59. FPIs may be exempt
from Exchange Act reporting requirements when trading on the U.S.
OTC markets if they maintain a listing of the subject class of
securities on one or more exchanges in a foreign jurisdiction that
constitutes the primary trading market for those securities, and
electronically publish certain information on an ongoing basis. See
also supra note 58.
\75\ For each company, market capitalization is measured as
global U.S. dollar market value of all traded common equity
securities as of the fiscal year-end date or, if there is no data
available for that date, from the next closest trading day with
available data. This data was collected from LSEG Workspace, a
database of worldwide financial data owned by the London Stock
Exchange Group. FPIs that have no available market capitalization
(28 FPIs) are excluded from these calculations. The main reason for
missing market capitalization data is that the FPI has no publicly
traded equity securities at the fiscal year-end date.
---------------------------------------------------------------------------
The decline and subsequent increase of 20-F FPIs documented in
Figure 1 above suggests that there has been significant turnover within
this population of FPIs in recent decades. To provide additional
insights into the nature of this turnover, the following two
subsections present the staff's findings on the jurisdictions of
incorporation and headquarters and equity trading markets of 20-F FPIs.
B. FPI Jurisdictions of Incorporation and Headquarters 76
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\76\ This section is based on data and analysis contained in
section 3 of the FPI Trends White Paper.
---------------------------------------------------------------------------
The staff's analysis of the jurisdictional makeup of 20-F FPIs
demonstrates a significant shift in recent decades. For example, in
fiscal year 2023, the most common jurisdiction of incorporation among
20-F FPIs was the Cayman Islands, and the most common jurisdiction of
headquarters for these issuers was mainland China. In contrast, in
fiscal year 2003, the most common
[[Page 24238]]
jurisdictions for both incorporation and headquarters for 20-F FPIs
were Canada (non-MJDS issuers) and the United Kingdom. Below, we
provide more detail on this analysis.
Tables 1 and 2 below present the top 20 jurisdictions of
incorporation and headquarters, respectively, for 20-F FPIs in fiscal
year 2023.\77\ The tables also provide statistics on the global market
capitalization (aggregate, mean, and median) of 20-F FPIs from each
jurisdiction. Table 1 shows that the Cayman Islands is the most common
jurisdiction of incorporation in fiscal year 2023, with more than 30
percent of 20-F FPIs being incorporated in the Cayman Islands. The 20-F
FPIs incorporated in the Cayman Islands tend to be smaller than the
typical 20-F FPI overall, with a median (mean) market capitalization of
approximately $104 million (approximately $3.3 billion).\78\ As a
result, despite the Cayman Islands representing the jurisdiction of
incorporation of over 30 percent of 20-F FPIs, the aggregate global
market capitalization for the 20-F FPIs incorporated in the Cayman
Islands represents around 11.6 percent of the aggregate global market
capitalization of all 20-F FPIs. Table 2 below shows that mainland
China was the most common jurisdiction of headquarters for 20-F FPIs in
fiscal year 2023, with more than 20 percent of such FPIs being
headquartered in China. However, because the average 20-F FPI
headquartered in China is smaller than the average 20-F FPI, the
aggregate global market capitalization for such FPIs represents around
five percent of the aggregate global market capitalization of all 20-F
FPIs.\79\
---------------------------------------------------------------------------
\77\ Information about jurisdictions of incorporation and of
company headquarters (i.e., ``principal executive offices'') is
collected from the FPIs' commission filings pertaining to any given
fiscal year.
\78\ See supra section III.A for the market capitalization
figures of all 20-F FPIs.
\79\ For a full breakdown of 20-F FPIs in fiscal year 2023 by
jurisdictions of incorporation and headquarters, see tables A1 and
A2, respectively, in the FPI Trends White Paper.
Table 1--Top 20 Jurisdictions of Incorporation of 20-F FPIs in FY 2023
--------------------------------------------------------------------------------------------------------------------------------------------------------
Aggregate Fraction of
Jurisdiction Count Fraction of market cap Mean market Median market total FPI
all FPIs (%) ($MM) cap ($MM) cap ($MM) market cap (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cayman Islands............................................... 322 33.3 $1,047,823 $3,274 $104 11.6
Israel....................................................... 97 10.0 116,454 1,201 121 1.3
Canada (non-MJDS) \a\........................................ 75 7.8 24,097 326 24 0.3
British Virgin Islands....................................... 62 6.4 13,008 220 29 0.1
United Kingdom............................................... 44 4.6 1,593,934 39,848 13,072 17.7
Marshall Islands............................................. 37 3.8 19,421 555 217 0.2
Netherlands.................................................. 31 3.2 637,474 21,249 827 7.1
Brazil....................................................... 29 3.0 494,825 17,672 7,892 5.5
Bermuda...................................................... 29 3.0 62,567 2,157 877 0.7
Australia.................................................... 23 2.4 497,161 21,616 171 5.5
Switzerland.................................................. 17 1.8 473,843 29,615 451 5.3
Japan........................................................ 15 1.6 930,908 62,061 26,490 10.3
Mexico....................................................... 14 1.4 160,776 12,367 3,647 1.8
France....................................................... 14 1.4 325,461 23,247 290 3.6
Luxembourg................................................... 13 1.3 114,032 8,772 3,048 1.3
Argentina.................................................... 13 1.3 25,665 1,974 1,345 0.3
Ireland...................................................... 11 1.1 68,580 6,235 302 0.8
South Korea.................................................. 11 1.1 102,902 9,355 7,582 1.1
Singapore.................................................... 10 1.0 22,313 2,231 117 0.2
Germany...................................................... 9 0.9 260,403 28,934 4,161 2.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Canadian issuers are not MJDS issuers if they do not qualify based on the eligibility requirements for the MJDS (e.g., because they do not meet the
75 million U.S. dollar public float requirement) or if they have elected to report as a 20-F FPI.
Table 2--Top 20 Jurisdictions of Headquarters of 20-F FPIs in FY 2023
--------------------------------------------------------------------------------------------------------------------------------------------------------
Aggregate Fraction of
Jurisdiction Count Fraction of market cap Mean market Median market total FPI
all FPIs (%) ($MM) cap ($MM) cap ($MM) market cap (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
China........................................................ 219 22.6 $462,669 $2,122 $84 5.1
Israel....................................................... 103 10.7 119,202 1,157 121 1.3
Canada (non-MJDS)............................................ 70 7.2 17,836 258 24 0.2
United Kingdom............................................... 63 6.5 1,844,040 31,255 2,957 20.5
Hong Kong, Special Administrative Region (``SAR''), China.... 45 4.7 220,018 5,117 56 2.4
Singapore.................................................... 45 4.7 52,660 1,197 96 0.6
Brazil....................................................... 39 4.0 506,586 13,331 5,081 5.6
United States................................................ 26 2.7 55,152 2,121 132 0.6
Bermuda...................................................... 24 2.5 50,368 2,099 1,555 0.6
Australia.................................................... 21 2.2 242,470 11,546 106 2.7
Greece....................................................... 21 2.2 7,849 374 124 0.1
Germany...................................................... 20 2.1 263,756 13,188 347 2.9
Switzerland.................................................. 18 1.9 473,863 27,874 409 5.3
Netherlands.................................................. 17 1.8 551,337 34,459 8,378 6.1
Japan........................................................ 16 1.7 930,975 58,186 23,465 10.3
[[Page 24239]]
Mexico....................................................... 15 1.6 162,914 11,637 3,258 1.8
Argentina.................................................... 15 1.6 27,129 1,809 1,312 0.3
France....................................................... 15 1.6 326,248 21,750 345 3.6
Ireland...................................................... 13 1.3 278,582 21,429 361 3.1
Taiwan....................................................... 13 1.3 575,596 44,277 630 6.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
The statistics presented in tables 1 and 2 reflect a different
composition of home country jurisdictions of 20-F FPIs today than in
fiscal year 2003, both in terms of jurisdiction of incorporation as
well as jurisdiction of headquarters. To illustrate this shift, tables
3 and 4 below present the top 20 jurisdictions of incorporation and of
headquarters, respectively, for 20-F FPIs in fiscal year 2003 alongside
the previously presented ranking of jurisdictions for fiscal year 2023.
Table 3--Top 20 Jurisdictions of Incorporation: FY 2003 vs. 2023
----------------------------------------------------------------------------------------------------------------
Fiscal year
-----------------------------------------------------------------------------------------------------------------
2003 2023
----------------------------------------------------------------------------------------------------------------
Country Count Country Count
----------------------------------------------------------------------------------------------------------------
Canada (non-MJDS)....................... 224 Cayman Islands.................. 322
United Kingdom.......................... 106 Israel.......................... 97
Israel.................................. 81 Canada (non-MJDS)............... 75
Brazil.................................. 48 British Virgin Islands.......... 62
Mexico.................................. 38 United Kingdom.................. 44
Netherlands............................. 33 Marshall Islands................ 37
France.................................. 32 Netherlands..................... 31
Japan................................... 29 Bermuda......................... 29
Australia............................... 27 Brazil.......................... 29
Bermuda................................. 23 Australia....................... 23
Chile................................... 22 Switzerland..................... 17
Germany................................. 19 Japan........................... 15
Argentina............................... 16 France.......................... 14
British Virgin Islands.................. 16 Mexico.......................... 14
China................................... 15 Argentina....................... 13
Switzerland............................. 14 Luxembourg...................... 13
Cayman Islands.......................... 13 Ireland......................... 11
Sweden.................................. 13 South Korea..................... 11
Hong Kong, SAR, China \a\............... 12 Singapore....................... 10
Ireland \a\............................. 12 Germany......................... 9
South Korea \a\......................... 12
----------------------------------------------------------------------------------------------------------------
\a\ Shared 19th place.
Table 4--Top 20 Jurisdictions of Headquarters: FY 2003 vs. 2023
----------------------------------------------------------------------------------------------------------------
Fiscal year
-----------------------------------------------------------------------------------------------------------------
2003 2023
----------------------------------------------------------------------------------------------------------------
Country Count Country Count
----------------------------------------------------------------------------------------------------------------
Canada (non-MJDS)....................... 218 China........................... 219
United Kingdom.......................... 106 Israel.......................... 103
Israel.................................. 81 Canada (non-MJDS)............... 70
Brazil.................................. 50 United Kingdom.................. 63
Mexico.................................. 38 Hong Kong, SAR, China........... 45
Netherlands............................. 35 Singapore....................... 45
France.................................. 31 Brazil.......................... 39
Hong Kong, SAR, China................... 30 United States................... 26
Japan................................... 29 Bermuda......................... 24
Australia............................... 25 Australia....................... 21
Chile................................... 22 Greece.......................... 21
China................................... 20 Germany......................... 20
Germany................................. 20 Switzerland..................... 18
Argentina............................... 17 Netherlands..................... 17
Ireland................................. 16 Japan........................... 16
Switzerland............................. 16 Argentina....................... 15
[[Page 24240]]
South Korea............................. 12 France.......................... 15
Sweden.................................. 12 Mexico.......................... 15
Bermuda................................. 11 Ireland......................... 13
Italy................................... 11 Taiwan.......................... 13
----------------------------------------------------------------------------------------------------------------
Although the total number of 20-F FPIs in fiscal year 2023 is
similar to that in fiscal year 2003, as shown in figure 1, tables 3 and
4 demonstrate that the composition of the 20-F FPI population in these
two years is very different. The two jurisdictions most frequently
represented among 20-F FPIs in fiscal year 2003 were Canada (non-MJDS
issuers) and the United Kingdom, both in terms of incorporation and the
location of headquarters. However, by fiscal year 2023 the number of
20-F FPIs either incorporated or headquartered in one of these two
countries had dropped significantly (by more than 66 percent for Canada
in each category, and by 58 percent and 40 percent for the United
Kingdom as jurisdiction of incorporation or headquarters,
respectively). In contrast, the number of 20-F FPIs incorporated in the
Cayman Islands grew from only 13 20-F FPIs in fiscal year 2003 to 322
in fiscal year 2023, becoming, by far, the most common jurisdiction of
incorporation for 20-F FPIs in fiscal year 2023. Similarly, the number
of 20-F FPIs headquartered in mainland China has grown significantly
over the same period, and mainland China was, by far, the most common
jurisdiction of headquarters in fiscal year 2023.
Besides showing a substantial change in the jurisdictional
composition of the 20-F FPI population in recent decades, tables 3 and
4 also suggest that there has been an increase in the divergence
between 20-F FPIs' jurisdictions of incorporation and jurisdictions of
headquarters. Further analysis by the staff demonstrated a significant
change in the fraction of 20-F FPIs with differing jurisdictions of
incorporation and of headquarters: the fraction of 20-F FPIs with
differing jurisdictions was seven percent in fiscal year 2003 but
increased to 48 percent in fiscal year 2023.\80\
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\80\ See Figure 2 in the FPI Trends White Paper for a complete
illustration of the trend in increasing divergence between
jurisdiction of incorporation and jurisdiction of headquarters over
the fiscal year 2003-2023 period.
---------------------------------------------------------------------------
The staff observed that one driver of the increased divergence
between jurisdictions of incorporation and jurisdictions of
headquarters was the increase in China-based issuers (``CBIs'') within
the 20-F FPI population since fiscal year 2003. For purposes of this
release, we define a CBI as an issuer that is either incorporated or
headquartered in one of the three Chinese jurisdictions: (1) mainland
China, (2) Hong Kong, SAR, or (3) Macau, SAR. In fiscal year 2003, the
number of CBIs represented approximately five percent of all 20-F FPIs,
with this number increasing to approximately 28 percent of all 20-F
FPIs in fiscal year 2023, representing an over five-fold increase in
the proportion of 20-F FPIs that were CBIs. Some of the CBIs in the 20-
F FPI population in fiscal year 2023 were headquartered in China (219
issuers), Hong Kong, SAR (45 issuers), or Macau, SAR (two issuers), but
nearly all were incorporated outside one of these three Chinese
jurisdictions.
In particular, we observe a significant overlap between being a CBI
and being incorporated in the Cayman Islands or the British Virgin
Islands (another jurisdiction that has risen to become a common
jurisdiction of incorporation for 20-F FPIs by fiscal year 2023). The
20-F FPIs that were CBIs in fiscal year 2023 were almost exclusively
incorporated (97 percent) in one of these two jurisdictions, with 219
issuers (82 percent) incorporated in the Cayman Islands and 40 issuers
(15 percent) incorporated in the British Virgin Islands.\81\
Conversely, among 20-F FPIs incorporated in the Cayman Islands or the
British Virgin Islands,\82\ more than 67 percent (259 issuers) were
CBIs.
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\81\ The remaining countries of incorporation for CBIs in 2023
are China (four issuers), Antigua (one issuer), Marshall Islands
(one issuer), and the United Kingdom (one issuer).
\82\ 384 issuers in total, making up almost 40% of all 20-F FPIs
in fiscal year 2023.
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The statistics discussed above suggest that much of the recent
resurgence of the 20-F FPI population has been driven by CBIs that are
incorporated in the Cayman Islands or the British Virgin Islands.\83\
Figure 2 below provides further insight into the increasing prominence
of this group of FPIs in the overall population of 20-F FPIs by
documenting the trends of the fraction of 20-F FPIs that are (1) Cayman
Islands or British Virgin Islands incorporated (``CI-BVI
Incorporated'') FPIs, (2) CBIs, and (3) both a CBI and CI-BVI
Incorporated.
---------------------------------------------------------------------------
\83\ Many CBIs are incorporated in these island jurisdictions,
while having their operations occur in mainland China. Specifically,
non-Chinese holding companies may enter into contractual
arrangements with China-based operating companies asunder the
Variable Interest Entities (``VIEs'') model. Through these
contractual arrangements, the non-Chinese holding companies are
generally able to consolidate the VIEs in their financial
statements. The Commission staff has noted in recent years that
these ``CBI VIE Structures'' pose risks to U.S. investors that are
not present in other organizational structures (i.e., difficulties
enforcing and exerting control through contractual arrangements; the
possibility of the Chinese government subjecting the issuer to
penalties, revocation of business and operating licenses or
forfeiture of ownership interests; or jeopardized control over the
China-based VIE if a natural person who holds equity interest in the
China-based VIE breaches the terms of the agreement, is subject to
legal proceedings, or uses any physical instruments without the
China-based issuer's authorization to enter into contractual
arrangements in China). See CF Disclosure Guidance: Topic No. 10,
Disclosure Considerations for China-Based Issuers, available at
https://www.sec.gov/rules-regulations/staff-guidance/disclosure-guidance/disclosure-considerations-china-based-issuers. The
statements in the CF Disclosure Guidance represent the views of the
Division of Corporation Finance. The CF Disclosure Guidance is not a
rule, regulation or statement of the Commission. Further, the
Commission has neither approved nor disapproved its content. The CF
Disclosure Guidance, like all staff statements, has no legal force
or effect: it does not alter or amend applicable law, and it creates
no new or additional obligations for any person.
---------------------------------------------------------------------------
Figure 2: Trends in the CBI and CI-BVI Incorporated FPI Sub-
populations, FY 2003-2023
[[Page 24241]]
[GRAPHIC] [TIFF OMITTED] TP09JN25.001
Figure 2 demonstrates a number of key findings. First, consistent
with table 4, the figure shows the increase in prevalence of CBIs in
the 20-F FPI population from fiscal year 2003 to 2023. Second, the
close tracking of the line representing the percentage of CBIs and the
line representing the percentage of issuers that are both CBIs and CI-
BVI Incorporated indicates that 20-F FPIs that are CBIs have had a
strong tendency to be CI-BVI Incorporated over the entire period.
Third, the fact that the distance between these lines has decreased in
the most recent years shown indicates that this tendency was especially
strong in those years. Finally, the fraction of 20-F FPIs that are CI-
BVI Incorporated has increased in the most recent years shown, well
beyond the other lines in the graph. Thus, it appears that
incorporating in the Cayman Islands or the British Virgin Islands is
also becoming increasingly popular among 20-F FPIs that are not CBIs.
Because staff observed that these additional CI-BVI Incorporated FPIs
are generally not headquartered in the same jurisdiction in which they
are incorporated, this trend further illustrates the increasing
divergence between 20-F FPIs' jurisdictions of incorporation and
jurisdictions of headquarters as observed in the staff's analysis.\84\
---------------------------------------------------------------------------
\84\ Given that home country jurisdictions impose varying levels
of regulatory oversight as discussed in section IV.A below,
increased divergence between the jurisdictions of incorporation and
jurisdictions of headquarters may be an indication that some FPIs
are seeking to limit regulatory costs through changing their place
of incorporation or headquarters.
---------------------------------------------------------------------------
C. FPI Reliance on U.S. Capital Markets 85
---------------------------------------------------------------------------
\85\ This section is based on the data and analysis contained in
section 4 of the FPI Trends White Paper.
---------------------------------------------------------------------------
In this section, we present the staff's analysis of the percentage
of 20-F FPIs' global equity trading volume that occurred in U.S.
capital markets and how this has changed over time.\86\ We then
describe the staff's analysis of the market capitalization and home
country jurisdictions of 20-F FPIs whose equities trade almost
exclusively in U.S. capital markets. These analyses focused on the
period from fiscal year 2014 through fiscal year 2023.\87\ Overall, the
staff observed that the global trading of 20-F FPIs' equity securities
has become increasingly concentrated in U.S. capital markets over this
period, whereby a majority of 20-F FPIs today have their equity
securities almost exclusively traded in U.S. capital markets.
---------------------------------------------------------------------------
\86\ The sample used for the analysis in this section starts
with all FPIs that filed an annual report on Form 20-F for any
fiscal year in the 2014-2023 period. The staff obtained each FPI's
list of global equities using LSEG's Advanced Equity Search tool
(``EQSRCH'') in LSEG Workspace, which contains a comprehensive
global history of an FPI's equity trading. Using LSEG Workspace, the
staff then mapped each stock to its global list of Ticker and
Exchange combinations.
\87\ The staff examined trading in years beginning in 2014
because a previous study has documented that the fraction of
reporting FPIs that list their securities only on a U.S. exchange
increased over the 2004-2013 period. In particular, using a large
sample of reporting FPIs (including MJDS issuers) with exchange-
listed equity securities in the United States, this study found that
the fraction of such FPIs that have securities exclusively listed on
U.S. exchanges steadily increased from less than 15% in 2004 to more
than 35% in 2013. See Boone, Audra L., Kathryn Schumann-Foster, and
Joshua T. White, 2021. ``Ongoing SEC Disclosures by Foreign Firms,''
The Accounting Review 96 (3), 91-120 (``Boone et al. study''). When
comparing the staff's findings to the findings of the Boone et al.
study, it is important to note that the sample the staff uses for
the analysis in this section includes only 20-F FPIs, whereas the
Boone et al. study also includes MJDS issuers. At the same time, the
staff's sample includes registered FPIs without a U.S. exchange
listing that have their equity securities traded on U.S. OTC
markets, whereas the Boone et al. study excludes such FPIs.
---------------------------------------------------------------------------
1. U.S. Percentage of Global Trading
For purposes of this analysis, the staff computed global daily
trading volume in U.S. dollars for all of the 20-F FPIs across all
global markets for which daily trading volume information was available
for each FPI.\88\ This global
[[Page 24242]]
daily trading volume was then aggregated for a 12-month window around
each 20-F FPI's fiscal year-end date, with a similar variable
constructed for each 20-F FPI's aggregated 12-month U.S. dollar trading
volume specifically in U.S. capital markets. The staff used the ratio
of these two variables to construct the ``U.S. Percentage of Global
Trading,'' an estimate of an FPI's reliance on U.S. capital markets for
trading of its equity securities in the 12-month period centered around
each fiscal year-end.
---------------------------------------------------------------------------
\88\ Trading data was available for approximately 97.5% of the
967 20-F FPIs that the staff identified for fiscal year 2023. The
remaining 24 20-F FPIs from fiscal year 2023 with missing trading
data were excluded from this analysis. For each fiscal year that an
FPI filed a Form 20-F, the staff collected the U.S. dollar value of
daily trading volume for each ticker-exchange combination available
for each 20-F FPI over a 12-month period centered around the fiscal
year-end date. Using dollar trading value instead of the number of
shares traded helped the staff to overcome the complications of
converting each ADR to its common share equivalent, since ADR ratios
vary and can change throughout the lifetime of an ADR. Trading was
measured for a 12-month period around the fiscal year-end date to
help ensure that the trading data reflected the conditions as of the
time of the other data in the analysis, which are recorded as of the
fiscal year-end dates. Additional details on the staff's methodology
are available in the FPI Trends White Paper.
---------------------------------------------------------------------------
Figure 3 below uses rank-percentile distributions to demonstrate
how the distribution of different levels of reliance on U.S. capital
markets has changed from fiscal year 2014 compared to fiscal year
2023.\89\
---------------------------------------------------------------------------
\89\ The rank-percentile distribution ranks 20-F FPIs in each
year by their U.S. Percentage of Global Trading, from the smallest
such percentage to the largest such percentage, dividing them into
100 bins. The first percentile bin, at the far left of the x-axis,
represents the 1% of 20-F FPIs with the lowest U.S. Percentage of
Global Trading. The 50th percentile bin, in the center of the x-
axis, represents the 1% of 20-F FPIs with the median U.S. Percentage
of Global Trading. The graph then plots, on the y-axis, the level of
U.S. Percentage of Global Trading for each of these bins.
---------------------------------------------------------------------------
Figure 3: Rank-Percentile Distribution of U.S. Percentage of Global
Trading, FY 2014 vs. FY 2023
[GRAPHIC] [TIFF OMITTED] TP09JN25.002
Figure 3 demonstrates that, even in fiscal year 2014, a large
fraction of 20-F FPIs seemed to trade almost exclusively in U.S.
capital markets--the 56th to 100th percentiles, or approximately 44
percent of the 20-F FPIs, were nearly at the maximum of 100 percent
(specifically, between 99 and 100 percent) U.S. Percentage of Global
Trading. But this fraction, and the degree of reliance on U.S. capital
markets even for those with lower reliance, increased by fiscal year
2023. In fiscal year 2023, 99 percent U.S. Percentage of Global Trading
was reached at about the 45th percentile, such that approximately 55
percent of 20-F FPIs traded almost exclusively in U.S. capital markets.
Furthermore, in fiscal year 2014, 25 percent of 20-F FPIs (from the
first to the 25th percentile along the x-axis) had no more than
approximately 22 percent U.S. Percentage of Global Trading. In
contrast, the lowest 25 percent of 20-F FPIs in fiscal year 2023 had up
to approximately 53 percent U.S. Percentage of Global Trading. Thus,
overall, there has been a shift from fiscal year 2014 to fiscal year
2023 toward a greater reliance on trading in U.S. capital markets
across the whole distribution of 20-F FPIs.
Figure 4 below presents more detail of the trends over time in the
fraction of 20-F FPIs that have a U.S. Percentage of Global Trading in
excess of the 99 percent, 90 percent, and 50 percent U.S. Percentage of
Global Trading thresholds, respectively (or equivalently, no more than
one percent, 10 percent, and 50 percent of global trade occurring
outside U.S. markets). Based on the data shown in Figure 4, there has
been a gradual increase from fiscal year 2014 to fiscal year 2023 in
the number of 20-F FPIs that appear to trade almost exclusively in the
United States.
Figure 4: Trends in Fraction of FPIs With Different Degrees of U.S.
Market Trading Focus, FYs 2014-2023
[[Page 24243]]
[GRAPHIC] [TIFF OMITTED] TP09JN25.003
The staff relied on the category meeting the 99 percent threshold
of U.S. Percentage of Global Trading to identify the group of 20-F FPIs
that appears to have their equity securities traded almost exclusively
in U.S. capital markets (``U.S. Exclusive FPIs'') versus those that do
not (``Non-U.S. Exclusive FPIs''). The 99 percent threshold ensures
that FPIs above this level are not likely to have a meaningful listing
of their equity securities outside of U.S. capital markets while
allowing that some occasional OTC trading can happen outside the United
States.\90\
---------------------------------------------------------------------------
\90\ A staff review of all 20-F FPIs in fiscal year 2023 that
had a U.S. Percentage of Global Trading of 99% or more (or
equivalently, less than 1% of global trade occurring outside U.S.
markets) confirmed that there is limited evidence of a cross listing
on an exchange outside the United States for these FPIs. The minimal
recorded non-U.S. trading is largely due to transactions conducted
on foreign OTC markets.
---------------------------------------------------------------------------
Using this bifurcation, Figure 4 shows that the fraction of U.S.
Exclusive FPIs among 20-F FPIs has increased from approximately 44
percent in fiscal year 2014 to almost 55 percent in fiscal year 2023,
consistent with the result from Figure 3 above. If we instead bifurcate
the population at the 90 percent U.S. Percentage of Global Trading
threshold, which can be viewed as a cut-off between 20-F FPIs that do
not have any significant trading outside U.S. capital markets versus
those that do, the group with more than 90 percent U.S. Percentage
Global Trading has increased its fraction in the population even more
dramatically than the U.S. Exclusive FPIs, going from approximately 48
percent in fiscal year 2014 to 64 percent in fiscal year 2023. Finally,
Figure 4 shows that a large majority of 20-F FPIs in fiscal year 2023
had more than 50 percent of their trading in U.S. capital markets. This
fraction also has significantly increased over the period from
approximately 64 percent in fiscal year 2014 to about 76 percent in
fiscal year 2023.
2. FPIs Trading Almost Exclusively in U.S. Capital Markets
This section presents the staff's analysis of the size and home
country jurisdictions of U.S. Exclusive FPIs, as defined in the
previous section, as compared to other 20-F FPIs. As detailed below,
the staff observed that U.S. Exclusive FPIs tend to have lower market
capitalizations and have a different composition of home country
jurisdictions than other 20-F FPIs. In particular, U.S. Exclusive FPIs
have a higher propensity of being incorporated in the Cayman Islands
and headquartered in China.
Table 6 below displays statistics on global market capitalizations
for U.S. Exclusive and Non-U.S. Exclusive FPIs, respectively, for
fiscal year 2023.
Table 6--Global Market Capitalization Statistics for FY 2023: U.S. Exclusive vs. Non-U.S. Exclusive FPIs \a\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
U.S.Exclusive FPIs Non-U.S. Exclusive FPIs
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Market cap
Median fraction of
Aggregate Mean market cap market Aggregate Mean market cap Median market U.S. Exclusive
Count market cap ($MM) cap Count market cap ($MM) cap ($MM) FPIs (%)
($MM) ($MM) ($MM)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
519............................................ 827,288 1,594 86 424.............................. 8,180,951 19,295 1,646 9.2
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ U.S. Exclusive FPIs are those with a U.S. Percentage of Global Trading of more than 99% and Non-U.S. Exclusive FPIs are those with a U.S. Percentage of Global Trading of 99% or less. For
each company, market capitalization is global U.S. dollar market value of all traded common equity securities as of the fiscal year-end date or if there is no data available for that date,
from the next closest trading day with available data. This data was collected from LSEG Workspace.
[[Page 24244]]
The table above shows that the aggregate global market
capitalization of U.S. Exclusive FPIs is much smaller on average than
that of Non-U.S. Exclusive FPIs. As a result, the aggregate global
market capitalization of U.S. Exclusive FPIs is only a small fraction
(nine percent) of the total aggregate global market capitalization of
20-F FPIs despite representing a majority of the 20-F FPIs.\91\
---------------------------------------------------------------------------
\91\ See table 4 in the FPI Trends White Paper for similar
yearly market capitalization statistics covering the entire fiscal
year 2013-2023 period.
---------------------------------------------------------------------------
The following pie charts graphically illustrate the fraction of 20-
F FPIs that are U.S. Exclusive FPIs (i.e., at least 99 percent U.S.
Percentage of Global Trading) in fiscal year 2023 in numerical terms as
well as in terms of the fraction of global market capitalization of 20-
F FPIs, with additional thresholds of U.S. Percentage of Global Trading
included for context.
Figure 5: Distribution of Companies and Market Capitalization by U.S.
Global Trading Percentage Categories for 20-F FPIs in FY 2023
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP09JN25.004
BILLING CODE 8011-01-C
The pie charts illustrate that while FPIs with a heavy reliance on
U.S. capital markets represent a large proportion of the number of 20-F
FPIs in fiscal year 2023 (pie chart A), they represent a smaller
fraction of the global market capitalization of 20-F FPIs due to their
smaller size (pie chart B). In particular, while 55 percent of 20-F
FPIs are U.S. Exclusive FPIs, this group only makes up 9.2 percent of
the aggregate 20-F FPI market capitalization. In contrast, 24.2 percent
of 20-F FPIs have a U.S. Global Trading Percentage of less than 50
percent, but that group makes up 66.3 percent of the 20-F FPI market
capitalization.
[[Page 24245]]
Next, tables 7 and 8 present the top jurisdictions of incorporation
and headquarters of U.S. Exclusive FPIs, relative to Non-U.S. Exclusive
FPIs for fiscal year 2023.
Table 7--Jurisdiction of Incorporation, FY 2023; U.S. Exclusive vs. Non-U.S. Exclusive FPIs
----------------------------------------------------------------------------------------------------------------
U.S. Exclusive Non-U.S. Exclusive
----------------------------------------------------------------------------------------------------------------
Country Count Fraction (%) Country Count Fraction (%)
----------------------------------------------------------------------------------------------------------------
Cayman Islands............... 265 51.1 Canada.......... 61 14.4
Israel....................... 58 11.2 Cayman Islands.. 53 12.5
British Virgin Islands....... 51 9.8 Israel.......... 38 9.0
Marshall Islands............. 33 6.4 United Kingdom.. 32 7.5
Bermuda...................... 14 2.7 Brazil.......... 27 6.4
Canada....................... 13 2.5 Netherlands..... 21 5.0
Netherlands.................. 9 1.7 Australia....... 18 4.2
United Kingdom............... 8 1.5 Bermuda......... 15 3.5
Ireland...................... 7 1.3 Argentina....... 13 3.1
Japan........................ 6 1.2 Mexico.......... 12 2.8
Luxembourg................... 6 1.2 France.......... 11 2.6
Australia.................... 5 1.0 Switzerland..... 11 2.6
Singapore.................... 5 1.0 Germany......... 9 2.1
Switzerland.................. 5 1.0 Japan........... 9 2.1
China........................ 4 0.8 South Korea..... 9 2.1
Guernsey..................... 4 0.8 British Virgin 7 1.7
Islands.
Jersey....................... 4 0.8 Chile........... 7 1.7
France....................... 3 0.6 Luxembourg...... 7 1.7
Italy........................ 3 0.6 India........... 6 1.4
All other jurisdictions (12). 16 3.1 All other 58 13.7
jurisdictions
(22).
--------------------------------- -------------------------------
Total.................... 519 100.0 Total........ 424 100.0
----------------------------------------------------------------------------------------------------------------
Table 8--Jurisdiction of Headquarters, FY 2023; U.S. Exclusive vs. Non-U.S. Exclusive FPIs
----------------------------------------------------------------------------------------------------------------
U.S. Exclusive Non-U.S. Exclusive
----------------------------------------------------------------------------------------------------------------
Country Count Fraction (%) Country Count Fraction (%)
----------------------------------------------------------------------------------------------------------------
China........................ 177 34.1 Canada.......... 57 13.4
Israel....................... 63 12.1 China........... 39 9.2
Hong Kong, SAR, China........ 40 7.7 Israel.......... 39 9.2
Singapore.................... 39 7.5 United Kingdom.. 34 8.0
United Kingdom............... 25 4.8 Brazil.......... 28 6.6
Greece....................... 19 3.7 Germany......... 18 4.2
United States................ 14 2.7 Argentina....... 15 3.5
Bermuda...................... 13 2.5 Australia....... 15 3.5
Canada....................... 12 2.3 Mexico.......... 12 2.8
Brazil....................... 10 1.9 Bermuda......... 11 2.6
Ireland...................... 9 1.7 France.......... 11 2.6
Japan........................ 7 1.3 Netherlands..... 11 2.6
Australia.................... 6 1.2 Switzerland..... 11 2.6
Cayman Islands............... 6 1.2 United States... 11 2.6
Switzerland.................. 6 1.2 Japan........... 9 2.1
Luxembourg................... 5 1.0 South Korea..... 8 1.9
Malaysia..................... 5 1.0 Taiwan.......... 8 1.9
Netherlands.................. 5 1.0 Chile........... 7 1.7
UAE.......................... 5 1.0 Luxembourg...... 7 1.7
All other jurisdictions (27). 53 10.2 All other 73 17.2
jurisdictions
(26).
--------------------------------- -------------------------------
Total.................... 519 100 Total........ 424 100
----------------------------------------------------------------------------------------------------------------
Table 7 shows that the Cayman Islands is by far the most common
jurisdiction of incorporation among U.S. Exclusive FPIs, with more than
50 percent of all U.S. Exclusive FPIs incorporated there.\92\ By
contrast, the Non-U.S. Exclusive group displays less concentration of
jurisdictions, with a larger set of countries being significantly
represented in the population. Similarly, table 8 shows that the
concentration of jurisdictions of headquarters is high among U.S.
Exclusive FPIs, albeit to a lesser extent than for incorporation, where
three
[[Page 24246]]
jurisdictions (China, Israel, and Hong Kong, SAR) make up more than 50
percent of the jurisdiction of headquarters among U.S. Exclusive FPIs,
whereas the distribution of jurisdictions is much less concentrated
among Non-U.S. Exclusive FPIs.
---------------------------------------------------------------------------
\92\ Given the trend of a significant increase in CI-BVI
incorporated FPIs, we note that such FPIs combined make up almost
61% of U.S. Exclusive FPIs in fiscal year 2023. If we add FPIs
incorporated in either of the two nations of the Marshall Islands
and Bermuda, the combined group of FPIs incorporated in any of these
island nations make up 70% of all U.S. Exclusive FPIs. See infra
section IV.A and note 94 for some points for consideration regarding
this subset of FPIs.
---------------------------------------------------------------------------
IV. Reassessment of the FPI Definition
A. Background
The changes in the characteristics of the FPI population reflected
in the staff's analysis in section III raise questions about whether
the current FPI definition is appropriately tailored. First, the
breakdown of 20-F FPIs' home country jurisdictions has changed
significantly in recent decades. As a result, more FPIs today appear to
have disclosure requirements under the rules of their home country
jurisdiction,\93\ specifically in regard to current reporting, that
differ from the disclosure requirements imposed on domestic issuers and
on issuers in countries whose representation within the FPI population
has been decreasing.\94\ This trend may have resulted in less
information about 20-F FPIs being made available to U.S. investors than
in the past, due to the FPI disclosure accommodations and their
interaction with home country requirements. The trend may also raise
questions about the extent of overall regulation that such FPIs face in
their home country jurisdictions, potentially resulting in increased
risks to U.S. investors in FPIs' securities or competitive implications
for domestic issuers and other FPIs.\95\
---------------------------------------------------------------------------
\93\ See, e.g., those incorporated or organized in the Cayman
Islands (33.3%), British Virgin Islands (6.4%), Bermuda (3.0%), and
Marshall Islands (3.8%). See supra table 1. Cayman Islands Companies
Act 2023 (which appears to limit current reporting obligations to
mergers and consolidations, bankruptcies, increases in capital, and
some corporate governance matters); BVI Companies Act (which appears
to only require the filing of amendments to governing corporate
documents and a register of directors); Bermuda Companies Act 1981
(which appears to have limited disclosure requirements in the case
of: a material change to the accuracy of particulars included in a
prospectus issued pertaining to continuously offered shares, a
reduction in share capital, a conversion of shares, a change in
accounting standards, and some mergers as well as requirements to
file certain information to be accessible for public inspection in
the case of mergers, amended corporate governance documents, and
changes in directors); Marshall Islands BCA (which appears to have
no public current reporting requirements and only minimal
requirements to disclose to shareholders amended corporate
governance documents, dividend issuances, cancellations of shares
and reductions in stated capital).
\94\ See, e.g., supra table 3 and table 4 in section III.B for
data regarding the decrease in 20-F FPIs incorporated or
headquartered in Canada, the European Union (e.g., the Netherlands,
France, Germany, et al.), the United Kingdom, Brazil and Japan. See
also, e.g., Canada's National Instrument 51-102, available at
https://www.bcsc.bc.ca/-/media/PWS/New-Resources/Securities-Law/Instruments-and-Policies/Policy-5/51102-NI-July-25-2023.pdf?dt=20230720164040; Europe's Market Abuse Regulation,
available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014R0596; the UK's Market Abuse Regulation (``U.K.
MAR''), available at https://www.legislation.gov.uk/eur/2014/596/contents and Disclosure Guidance and Transparency Rules, available
at https://www.handbook.fca.org.uk/handbook/DTR; Brazil's CVM
Instruction No 480, of Dec. 7, 2009; Japan's Financial Instrument
and Exchange Act (Act No. 25 of Apr. 13, 1948) and Corporate
Disclosure Ordinance Art. 19.
\95\ See supra section II.B for a discussion of the FPI
accommodations as compared to the requirements for domestic issuers.
---------------------------------------------------------------------------
Second, the staff's analysis in section III indicates that an
increasing percentage of 20-F FPIs' equity securities trade almost
entirely in U.S. capital markets, rather than foreign markets, which
raises questions about the extent to which such issuers are regulated
in foreign markets. While the staff's analysis indicated that these
documented trends are driven by 20-F FPIs with relatively small market
capitalizations, the number of these FPIs is significant, and their
share of aggregate global market capitalization may increase over time.
The staff analysis shows that as of fiscal year 2023, over 50 percent
of 20-F FPIs appear to have had no or minimal (less than one percent of
total global) trading of their equity securities on any non-U.S. market
over a 12-month period centered around the fiscal year-end date and
appear to maintain listings of their equity securities only on U.S.
national securities exchanges. As a result, the United States is
effectively those issuers' exclusive or primary trading market and such
issuers may be even less likely to be subject to meaningful disclosure
requirements and oversight outside of the United States. As discussed
above in section II.A, the current regulatory accommodations for FPIs
were based, in part, on the expectation that most FPIs would be subject
to meaningful disclosure and other regulatory requirements in their
home country jurisdictions, which no longer appears to be the case for
a significant number of FPIs.
Some jurisdictions provide issuers organized under their laws or
listed on their exchanges with exemptions from their disclosure
requirements or other regulatory accommodations if the issuers qualify
as FPIs under U.S. securities laws. For example, the Israel Securities
Authority \96\ exempts such issuers from certain home country reporting
requirements and instead permits them to report according to the laws
of the jurisdiction of their primary listing. The amendments and
guidance promulgated by some regulators specifically consider the
accommodations granted under the FPI regulatory framework in the United
States.\97\ The reasons that foreign jurisdictions have chosen to defer
to U.S. securities law may vary and are not necessarily a sign that
foreign disclosure frameworks are deficient. However, the result of
this deference is that a key
[[Page 24247]]
element that would otherwise assure investor protections despite the
FPI accommodations--that an FPI is subject to meaningful disclosure
requirements in its home country or due to its foreign listing--could
be absent,\98\ and the Commission's rules and regulations might
effectively be providing the primary or sole source of reporting
requirements. This appears to be at odds with the historical
expectations expressed by the Commission with regard to FPIs.\99\
---------------------------------------------------------------------------
\96\ See Israel Securities Authority (ISA), section 35EE(b) of
the Law and the Securities Regulations (Periodic and Immediate
Reports of Foreign Corporations) 2000, available at https://www.new.isa.gov.il/images/Fittings/isa/asset_library_pic/al_lobby/al_lobby-64805b1867e84/2652015_2.pdf, which does not require the
disclosure under the ISA rules and instead relies on the reports
that dual listed companies are required to file according to the
foreign law, including for those companies incorporated in Israel.
See also, ISA, Legal Position No. 1991-11: Reporting Requirements of
Dual Listed Companies (Aug. 18, 2013), available at https://www.new.isa.gov.il/en/nav-index/supervised-double-listing/Staf-Positions-PlenaryDecisions (``[T]his arrangement exempts companies
listed for trade in Israel from reporting requirements pursuant to
the Israeli Securities Law and permits them to continue to report
exclusively according to the foreign law that applies to them (U.S.
or U.K. security laws, including the directives of the relevant
stock exchanges).'').
\97\ See ISA Legal Position No. 1991-11, supra note 97 (``By
adopting the dual listing arrangement, the legislator accepted the
significant differences between the reporting format of companies
traded exclusively in Israel and the reporting format of companies
traded on another main market, and for which the TASE is a secondary
trading arena'' and ``we note that at the time the dual listing
arrangement was enacted, it was known that Israeli companies
overseas receive exemptions on certain disclosure requirements
compared to the disclosure requirements that apply to U.S.
companies, but it was ultimately decided not to demand that they
meet the more stringent requirements.''). Other jurisdictions, such
as the UK, specifically consider the accommodations granted under
the U.S. FPI framework in their continuous disclosure regulations.
See Financial Conduct Authority, PS 24/6 Primary Markets
Effectiveness Review: Feedback to CP 23/31 and final UK Listing
Rules (July 17, 2024), available at https://www.fca.org.uk/publication/policy/ps24-6.pdf, which applies the more flexible
continuous disclosure rules of the previous standard listing segment
to overseas issuers in the international commercial companies
secondary listing category and requires overseas issuers to comply
with the applicable rules of the overseas market of their primary
listing: (``[W]e proposed introducing a new secondary listings
category for the equity shares of non-UK incorporated companies that
sought a `secondary' listing in the UK (i.e., they already had at
least one other equity listing on another market). The intention was
to ensure the new listing structure remains accessible to non-UK
incorporated companies where either domestic company law or rules
flowing from their `primary' listing venue may mean they would not
be eligible for the commercial companies category. . . We have
removed the reference to `without modification' in the definition of
qualifying home listing that was included in the draft rule. This is
to reflect feedback that some regimes impose additional requirements
on primary listings when an issuer is treated as a foreign primary
listing for the purposes of that market. It was not our intention to
exclude these issuers from this category (e.g., issuers treated as
Foreign Private Issuers in the US) and so we have amended the
rule.'').
\98\ See ISA Legal Position No. 1991-11, supra note 97
(``Protection of the investor public in Israel based on several
rings of regulation, mainly the foreign law, the regulation by the
foreign regulator, and the market discipline in those countries.'').
\99\ See supra section I. See also, supra note 2.
---------------------------------------------------------------------------
If an FPI is not subject to meaningful requirements in its home
country jurisdiction that elicit disclosure in a timely manner, or if
there are other limitations to foreign regulatory oversight of the FPI,
the FPI definition may need to be revised. In particular, the FPI
definition may need to be adjusted to ensure that (1) U.S. investors
receive appropriate disclosure and remain adequately protected when
investing in FPIs' securities and (2) that the discrepancy in
regulatory requirements does not have unintended competitive
implications.
B. Potential Regulatory Responses
To ensure that the Commission's accommodations for foreign issuers
are appropriately tailored to reflect today's FPI population while
continuing to protect U.S. investors and provide them with access to
foreign issuers' securities, we are soliciting public comments on
whether accommodations afforded to FPIs today should continue to apply
to the foreign issuers currently captured by the FPI definition or if
the definition should be amended to reflect recent changes to the FPI
population described above.\100\ Further, we are soliciting public
input on several possible approaches to amending the FPI definition. We
welcome and encourage market participants and other interested persons
to submit their views on the potential regulatory responses discussed
below or on any alternatives that they deem appropriate. We also
encourage the submission of qualitative information, quantitative data
or analyses, or suggestions of analyses that could better inform us
about the potential costs and benefits of these approaches, including
anticipated impacts on efficiency, competition, and capital formation.
---------------------------------------------------------------------------
\100\ We are not seeking comments on the requirements for MJDS
issuers because this release is focused on the FPI definition. See
supra section III.
---------------------------------------------------------------------------
Request for Comment
1. Does the shift in the characteristics of the FPI population
described above warrant a reassessment of the FPI definition, and if
so, what considerations should be taken into account in determining how
to amend the FPI definition? To what extent are any concerns about this
shift in the characteristics of the FPI population mitigated by the
relatively limited total market capitalization of the growing subsets
of U.S. Exclusive FPIs discussed above, contrasted with the relatively
larger number of such FPIs? To what extent are any concerns about this
shift in the characteristics of the FPI population mitigated by any
other factors?
2. Given the accommodations afforded to FPIs, as outlined in
section II.B, are U.S. investors in issuers currently eligible for FPI
status sufficiently protected? Specifically, do investors receive the
information they need to make informed investment decisions about
issuers currently eligible for FPI status? Do the expectations of U.S.
investors and other U.S. capital market participants sufficiently
incentivize reporting FPIs to voluntarily provide more disclosure and
comply with additional regulatory requirements even if they are
registered or incorporated in countries with less stringent regulations
and/or are primarily traded in the United States? If changes to the
current accommodations are necessary, what are the potential costs and
benefits?
3. Are U.S. investors that are currently invested in FPIs that
utilize a CBI VIE Structure, or that utilize a structure similar to a
CBI VIE Structure, sufficiently protected? Do investors have sufficient
information about such structures to evaluate their attendant risks?
Should foreign issuers with CBI VIE structures, or similar structures,
be eligible for FPI status?
4. Are domestic issuers currently at a competitive disadvantage as
compared to reporting FPIs that are listed exclusively in the United
States and incorporated in jurisdictions that do not impose meaningful
disclosure and other regulatory requirements in their home country?
5. When U.S. investors trade in shares of foreign issuers listed
solely on foreign exchanges, what transaction costs do they incur? To
what extent are U.S. investors restricted in trading on foreign
exchanges? How has U.S. investor access to such foreign listed
securities changed over time?
1. Update the Existing FPI Eligibility Criteria
As discussed in section II.A above, the current FPI definition was
first adopted in 1983 and amended in 1999.\101\ The criteria in the
current FPI definition were originally set forth by the Commission as
intended to determine whether an issuer is an ``essentially U.S.
issuer,'' with the Commission stating an expectation that the criteria
of the shareholder and business contacts tests would suffice to prevent
evasion but be unlikely to apply to issuers not intended to be
covered.\102\
---------------------------------------------------------------------------
\101\ See 1983 Release, supra note 18 and 1999 International
Disclosure Standards Release, supra note 19.
\102\ See 1983 Release, supra note 18.
---------------------------------------------------------------------------
One potential approach to amending the FPI definition given the
changes we have observed in the FPI population would be to update the
existing bifurcated test.\103\ For example, we could lower the existing
50 percent threshold of U.S. holders in the shareholder test, above
which a foreign issuer would need to apply the business contacts test
to be eligible for FPI status.\104\ We could also revise the existing
list of criteria under the business contacts test by either adding new
criteria (see discussion in sections IV.B.2-6 below) or revising the
existing threshold for assets located in the United States.
---------------------------------------------------------------------------
\103\ See supra section II.A for definitions of the
``shareholder test'' and the ``business contacts test.''
\104\ Id.
---------------------------------------------------------------------------
Request for Comment
6. Does the current FPI definition appropriately capture those
foreign issuers that are subject to home country disclosure and other
regulatory requirements that merit accommodation under the Federal
securities laws?
7. Should we consider updating the existing FPI eligibility
criteria rather than adding new eligibility criteria (as discussed in
sections IV.B.2-6 below)? To what extent would such updated criteria
address the considerations discussed in section IV.A above?
8. Should we update the existing 50 percent threshold in the
shareholder test by decreasing that level to a lower percentage
threshold, which may reduce the number of eligible FPIs? What should
the new threshold be? Would decreasing the U.S. ownership threshold
result in advantages or disadvantages to U.S. investors and FPIs?
9. Should we update the existing criteria for the business contacts
test? For example, should we update the threshold for U.S. assets? What
should the new threshold be? Should the test
[[Page 24248]]
consider citizenship or residency of anyone else? Are there other
criteria that should be considered in the business contacts test? If
so, what should they be?
10. Is the current FPI definition that relies on ownership and
business contacts still relevant in today's capital markets or should
any part of it be removed completely?
11. What would be the potential costs and benefits, including
impacts on efficiency, competition, and capital formation, to FPIs and
U.S. investors of updating the current FPI definition thresholds or
criteria? We welcome any qualitative or quantitative information that
could aid in such an evaluation.
2. Foreign Trading Volume Requirement
One potential approach to revising the FPI definition, either as an
alternative or in addition to updating the existing eligibility
criteria, would be to add a foreign trading volume test. For example,
an amended definition could require that FPIs assess their foreign and
U.S. trading volume on an annual basis to determine continued
eligibility for FPI status. We currently apply similar tests in other
contexts, including in Rule 12g3-2(b),\105\ which contemplates a 55
percent threshold of trading on foreign markets, and Rule 12h-6,\106\
which contemplates a 95 percent threshold of trading on foreign
markets. It is possible that issuers that have a consistent and
meaningful amount of their securities traded on a non-U.S. market could
be more likely to be subject to home country oversight, disclosure, and
other regulatory requirements that merit accommodation than issuers
whose securities are primarily or exclusively traded in the United
States.\107\
---------------------------------------------------------------------------
\105\ Supra note 59. Rule 12g3-2(b)(1) requires FPIs relying on
the exemption to maintain a listing on an exchange in a foreign
jurisdiction where at least 55% of trading in the subject class of
the issuer's securities takes place.
\106\ Supra note 61. Rule 12h-6 restricts the ability of an FPI
to terminate its U.S. registration and reporting obligations if the
average daily trading volume of the subject class of the FPI's
securities in the United States for a recent 12-month period has
been greater than 5% of its volume on a worldwide basis.
\107\ See, e.g., supra notes 94-99.
---------------------------------------------------------------------------
For example, a foreign trading volume test could apply in addition
to the current shareholder test or business contacts test \108\ and
require an FPI to have a certain percentage of the trading volume of
its securities in a market or markets outside the United States over a
preceding 12-month period. The Commission staff has recently conducted
an analysis to estimate how many current reporting FPIs would be
affected through loss of FPI status under a selection of such foreign
trading volume requirements, based on the sample of 20-F FPIs and
calculation of U.S. Percentage (or conversely Non-U.S. Percentage) of
Global Trading in the analysis in section III.B above.
---------------------------------------------------------------------------
\108\ See supra section II.A for definitions of the
``shareholder test'' and the ``business contacts test.''
---------------------------------------------------------------------------
The staff's current estimates of affected FPIs using a one percent,
three percent, five percent, 10 percent, 15 percent, and 50 percent
threshold for non-U.S. trading volume to determine FPI status are as
follows:
Table 9--Counts of Affected vs. Non-Affected 20-F FPIs for Different Non-U.S. Trading Thresholds
[FY 2023]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Count % of sampled FPIs Count % of sampled FPIs Count % of sampled FPIs
--------------------------------------------------------------------------------------------------------------------------------------------------------
1% Non-U.S. Trading
3% Non-U.S. Trading
5% Non-U.S. Trading
--------------------------------------------------------------------------------------------------------------------------------------------------------
Affected..................................... 519 55.04 571 60.55 588 62.35
Unaffected................................... 424 44.96 372 39.45 355 37.65
----------------------------------------------------------------------------------------------------------
Total.................................... 943 100.00 943 100.00 943 100.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
10% Non-U.S. Trading
15% Non-U.S. Trading
50% Non-U.S. Trading
--------------------------------------------------------------------------------------------------------------------------------------------------------
Affected..................................... 607 64.37 621 65.85 716 75.93
Unaffected................................... 336 35.63 322 34.15 277 24.07
----------------------------------------------------------------------------------------------------------
Total.................................... 943 100.00 943 100.00 943 100.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 10--Affected 20-F FPIs by Most Affected Jurisdictions of Incorporation for Different Non-U.S. Trading Thresholds
[FY 2023]
--------------------------------------------------------------------------------------------------------------------------------------------------------
% affected FPIs in % affected FPIs
Jurisdiction Count jurisdiction Jurisdiction Count in jurisdiction
--------------------------------------------------------------------------------------------------------------------------------------------------------
1% Non-U.S. Trading 3% Non-U.S. Trading
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cayman Islands................................ 265 83.33 Cayman Islands................... 284 89.31
Israel........................................ 58 60.42 Israel........................... 62 64.58
British Virgin Islands........................ 51 87.93 British Virgin Islands........... 55 94.83
Marshall Islands.............................. 33 94.29 Marshall Islands................. 34 97.14
Bermuda....................................... 14 48.28 Canada (non-MJDS)................ 18 24.32
Canada (non-MJDS)............................. 13 17.57 Bermuda.......................... 17 58.62
Netherlands................................... 9 30.00 Netherlands...................... 12 40.00
United Kingdom................................ 8 20.00 United Kingdom................... 11 27.50
Ireland....................................... 7 63.64 Luxembourg....................... 9 69.23
Japan......................................... 6 40.00 Ireland.......................... 8 72.73
Luxembourg.................................... 6 46.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 24249]]
5% Non-U.S. Trading 10% Non-U.S. Trading
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cayman Islands................................ 288 90.57 Cayman Islands................... 294 92.45
Israel........................................ 63 65.62 Israel........................... 63 65.62
British Virgin Islands........................ 55 94.83 British Virgin Islands........... 55 94.83
Marshall Islands.............................. 34 97.14 Marshall Islands................. 34 97.14
Canada (non-MDJS)............................. 20 27.03 Canada (non-MDJS)................ 23 31.08
Bermuda....................................... 18 62.07 Bermuda.......................... 19 65.52
Netherlands................................... 13 43.33 Netherlands...................... 16 53.33
United Kingdom................................ 13 32.50 United Kingdom................... 13 32.50
Australia..................................... 9 39.13 Australia........................ 10 43.48
Ireland....................................... 9 81.82 Ireland.......................... 9 81.82
Luxembourg.................................... 9 69.23 Luxembourg....................... 9 69.23
--------------------------------------------------------------------------------------------------------------------------------------------------------
15% Non-U.S. Trading 50% Non-U.S. Trading
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cayman Islands................................ 297 93.40 Cayman Islands................... 308 96.86
Israel........................................ 68 70.83 Israel........................... 80 83.33
British Virgin Islands........................ 56 96.55 British Virgin Islands........... 57 98.28
Marshall Islands.............................. 34 97.14 Canada (non-MDJS)................ 40 54.05
Canada (non-MJDS)............................. 23 31.08 Marshall Islands................. 34 97.14
Bermuda....................................... 20 68.97 Bermuda.......................... 24 82.76
Netherlands................................... 16 53.33 Netherlands...................... 22 73.33
United Kingdom................................ 13 32.50 United Kingdom................... 15 37.50
Australia..................................... 10 43.48 Australia........................ 13 56.52
Ireland....................................... 9 69.23 Ireland.......................... 10 90.91
Luxembourg.................................... 9 81.82 Luxembourg....................... 10 76.92
Singapore..................................... 9 90.00 Argentina........................ 10 76.92
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 11--Affected 20-F FPIs by Most Affected Jurisdictions of Headquarters for Different Non-U.S. Trading Thresholds
[FY 2023]
--------------------------------------------------------------------------------------------------------------------------------------------------------
% affected FPIs in % affected FPIs
Jurisdiction Count jurisdiction Jurisdiction Count in jurisdiction
--------------------------------------------------------------------------------------------------------------------------------------------------------
1% Non-U.S. Trading 3% Non-U.S. Trading
--------------------------------------------------------------------------------------------------------------------------------------------------------
China......................................... 177 81.94 China............................ 192 88.89
Israel........................................ 63 61.76 Israel........................... 67 65.69
Hong Kong, SAR, China......................... 40 93.02 Hong Kong, SAR, China............ 40 93.02
Singapore..................................... 39 88.64 Singapore........................ 41 93.18
United Kingdom................................ 25 42.37 United Kingdom................... 31 52.54
Greece........................................ 19 90.48 Greece........................... 20 95.24
United States................................. 14 56.00 United States.................... 17 68.00
Bermuda....................................... 13 54.17 Canada (non-MJDS)................ 15 21.74
Canada (non-MJDS)............................. 12 17.39 Bermuda.......................... 14 58.33
Brazil........................................ 10 26.32 Brazil........................... 10 26.32
Ireland.......................... 10 76.92
--------------------------------------------------------------------------------------------------------------------------------------------------------
5% Non-U.S. Trading 10% Non-U.S. Trading
--------------------------------------------------------------------------------------------------------------------------------------------------------
China......................................... 193 89.35 China............................ 199 92.13
Israel........................................ 68 66.67 Israel........................... 68 66.67
Singapore..................................... 42 95.45 Singapore........................ 42 95.45
Hong Kong, SAR, China......................... 40 93.02 Hong Kong, SAR, China............ 40 93.02
United Kingdom................................ 33 55.93 United Kingdom................... 33 55.93
Greece........................................ 20 95.24 Canada (non-MJDS)................ 20 28.99
United States................................. 18 72.00 Greece........................... 20 95.24
Canada (non-MJDS)............................. 17 24.64 United States.................... 18 72.00
Bermuda....................................... 14 58.33 Bermuda.......................... 15 62.50
Ireland....................................... 11 84.62 Ireland.......................... 11 84.62
Australia........................ 11 52.38
--------------------------------------------------------------------------------------------------------------------------------------------------------
15% Non-U.S. Trading 50% Non-U.S. Trading
--------------------------------------------------------------------------------------------------------------------------------------------------------
China......................................... 202 93.52 China............................ 209 96.76
Israel........................................ 73 71.57 Israel........................... 86 84.31
[[Page 24250]]
Singapore..................................... 43 97.73 Singapore........................ 43 97.73
Hong Kong, SAR, China......................... 40 93.02 Hong Kong, SAR, China............ 41 95.35
United Kingdom................................ 33 55.93 Canada (non-MJDS)................ 36 52.17
Canada (non-MJDS)............................. 20 28.99 United Kingdom................... 35 59.32
Greece........................................ 20 95.24 United States.................... 20 80.00
United States................................. 18 72.00 Greece........................... 20 95.24
Bermuda....................................... 16 66.67 Bermuda.......................... 19 79.17
Australia..................................... 11 52.38 Germany.......................... 14 70.00
Ireland....................................... 11 84.62
--------------------------------------------------------------------------------------------------------------------------------------------------------
According to these estimates, at the lowest one percent threshold,
over half of current reporting FPIs would lose their FPI status.
Increasing the threshold from one percent to five percent would not
dramatically increase the number of affected FPIs but could make it
harder for FPIs seeking to minimize their regulatory burdens to
``game'' the system (e.g., by establishing a small foreign market for
their securities solely to avoid complying with the registration and
reporting requirements for domestic issuers).
Request for Comment
12. Is a foreign trading volume test an appropriate way to
determine whether a foreign issuer should be eligible for FPI
accommodations? Would it be a useful means of assessing the likelihood
that a foreign issuer is subject to home country disclosure and other
regulatory requirements that merit accommodation? To what extent would
it disqualify FPIs for which such accommodations would be appropriate?
Might some home country jurisdictions still provide exemptions from
reporting requirements to issuers that either qualify as an FPI in the
United States or whose primary trading market is the United States even
if the percentage of the FPI's securities traded in U.S. capital
markets falls under a threshold below 50 percent?
13. Would adopting a foreign trading volume test for FPIs enhance
securities pricing in U.S. capital markets by ensuring that information
is being efficiently incorporated into an FPI's equity security prices
through trading activity on its foreign market exchange?
14. Are investors in FPIs' securities that are traded primarily or
exclusively in the United States disadvantaged by potential delays in
disclosure, differential access to information, or more limited
liability (i.e., for disclosures that are ``furnished'' rather than
``filed''), that may result in a greater likelihood of FPI securities
being mispriced by U.S. capital markets?
15. What would be the appropriate threshold for a foreign trading
volume test (e.g., one percent, three percent, five percent, 10
percent, 15 percent, 50 percent, or some other percentage)? Why would
any of these thresholds be appropriate? What would be the benefits and
costs to FPIs and U.S. investors under each or any proposed threshold?
16. Would a low threshold be susceptible to ``gaming'' by issuers
who may seek to establish minimal foreign trading that satisfies such
threshold shortly before the annual determination date of their FPI
status? If so, how could a foreign trading volume requirement be
revised to reduce the risk of such gaming? Are there other forms of
potential gaming with respect to a foreign trading volume requirement
that we should consider?
17. Should the threshold percentage for a foreign trading volume
test be computed as the percentage of the aggregate annual daily
trading volume attributable to non-U.S. markets (i.e., weighted by
shares traded) or as the average of the percentage of daily trading
volume attributable to non-U.S. markets (i.e., weighted by days) or in
some other way? Please explain why. Should foreign trading volume for
this purpose be measured in dollars or shares, and why?
18. Given that a foreign trading volume test would necessitate
compiling and tracking data on the foreign trading of FPIs, what source
should be used for such data? Are there known methods and sources of
information that market participants use to obtain reliable and readily
available data on trading volume in foreign markets?
19. Would a foreign trading volume test at any particular
percentage disproportionately impact issuers in a specific industry or
jurisdiction? If so, what, if anything, should or could be done to
mitigate such effects? Would a foreign trading volume test at any
particular percentage disproportionately impact issuers within a
particular range of market capitalization? If so, what, if anything,
should or could be done to mitigate such effects? Would any other
categories of issuers be disproportionally impacted?
20. If the FPI definition is amended to include a foreign trading
volume test, should the test assess the level of foreign trading of the
issuer's common equity or ordinary shares? Should it also assess
trading of other types of securities, such as debt securities? Should
the test consider any disparate voting rights that are present in the
issuer's capital structure (such as publicly traded common stock with
no voting rights)? If the foreign trading volume test assesses foreign
trading of the issuer's common equity or ordinary shares as well as
trading of other types of securities, how should those metrics be
weighted? What would be the potential costs and benefits of such a
multi-factor approach?
21. Should trading only in certain types of foreign trading markets
be considered in any foreign trading volume test? For example, should
only trading that takes place on a major foreign exchange, as discussed
in section IV.B.3 below, be considered in such a test?
22. What period of time is appropriate for assessing whether a
foreign issuer has a meaningful level of trading activity in a non-U.S.
market? For example, would a test that assesses the level of trading in
a non-U.S. market over a 52-week period preceding the issuer's
determination date for FPI eligibility be appropriate?
23. If a foreign trading volume test is imposed, how often should
the Commission reassess the threshold and consider amendments to the
rule, if at all?
[[Page 24251]]
24. What would be the potential costs and benefits, including
impacts on efficiency, competition, and capital formation, to FPIs and
U.S. investors of adding a foreign trading volume requirement to the
FPI definition?
3. Major Foreign Exchange Listing Requirement
We are also soliciting comment on potentially requiring FPIs to be
listed on a major foreign exchange, particularly in connection with a
trading volume requirement as described above. Adding a major exchange
listing requirement may help to ensure that FPIs are subject to
meaningful regulation and oversight in a foreign market and increase
the market incentives to provide material and timely disclosure to
investors. In determining which exchanges fit the definition of a
``major foreign exchange,'' one approach would be for the Commission to
maintain a list of foreign exchanges whose listing requirements meet
certain specific criteria. We currently apply variations of this
approach in other contexts, including in Regulation S \109\ to specify
certain exchanges as a ``designated offshore securities market.'' \110\
For example, the Commission could prescribe certain criteria that the
listing requirements of a foreign exchange must meet to be considered
``major,'' which could include a threshold of total market size
reflected, corporate governance requirements, reporting and other
public disclosure requirements, enforcement authority, or other
factors. Exchanges that meet the requisite standards could be
automatically deemed ``major,'' or the Commission could require a
formal application and determination process for each individual
exchange.
---------------------------------------------------------------------------
\109\ 17 CFR 230.901 through 230.905.
\110\ 17 CFR 230.902. Designated offshore securities markets are
defined under Regulation S for purposes of identifying whether an
offer or sale is made in an ``offshore transaction'' and can include
any foreign securities exchange or non-exchange market designated by
the Commission. Although a number of attributes are listed in
Regulation S as factors for consideration in determining whether to
designate such a market, a designated offshore securities market
within the meaning of Regulation S might not meet the same
eligibility standards we would potentially set forth under a major
foreign exchange listing requirement.
---------------------------------------------------------------------------
While a ``major foreign exchange'' requirement could help to ensure
that FPIs are subject to meaningful regulation and oversight in a
foreign market, it would require the Commission to evaluate and stay
apprised of the particulars of each relevant exchange, which could
depend in part on the level of cooperation and information-sharing it
receives from the relevant exchange. Once an exchange has been
designated a ``major foreign exchange,'' any subsequent determination
that warrants a change in the designation could be highly disruptive to
issuers. Furthermore, any particular criteria we may set forth for a
``major'' exchange based on our understanding of U.S. exchanges may
prove to be less suitable in the foreign context, potentially giving
rise to unintended consequences for both U.S. investors and FPIs. It
could also result in foreign issuers that are not listed on qualifying
major exchanges, but that are still subject to meaningful regulation in
their home country jurisdiction, becoming ineligible for FPI status.
Request for Comment
25. Should we consider a requirement that FPIs be listed on a
``major foreign exchange''? If so, how should we define whether a
foreign exchange is ``major''? In determining whether a foreign
exchange is ``major,'' how should we treat exchanges that offer
different listing tiers, some of which may have less stringent listing
requirements?
26. Would a requirement that FPIs be listed on a ``major foreign
exchange'' reduce the incentive for foreign issuers to list in U.S.
capital markets? Would many FPIs leave U.S. capital markets if they are
also required to be listed on a ``major foreign exchange'' to maintain
the FPI status and avoid reporting as a domestic issuer?
27. What specific criteria should be considered in evaluating
whether a foreign exchange is ``major''? For example, which, if any, of
the following criteria should be considered and what thresholds should
apply: aggregate market value of publicly held shares, closing price of
shares, number of shareholders, average monthly trading volume,
earnings, global market capitalization, triggers for stockholder
approval, requirements for an independent compensation committee,
periodic reporting, review of public disclosure, the authority of a
particular exchange to enforce its rules, or any other criteria? Which
data sources should be used to evaluate such criteria? Would applying
such criteria help ensure that FPIs are subject to meaningful
regulation and oversight in a foreign market?
28. How often should we assess whether a foreign exchange is
``major,'' and what procedure should be followed to transition FPIs
that are listed on an exchange that is no longer deemed ``major'' to
reporting as a domestic issuer?
29. Should we consider the disclosure and corporate governance
requirements of an exchange's listing standards when determining
whether it is a ``major foreign exchange''? If so, what requirements
should be considered and why?
30. Should we consider the type of securities an FPI has listed on
such major foreign exchange when determining whether a listing would
meet this new requirement? If so, what types of securities (e.g., only
common equity, both common equity and debt, etc.) should be considered
and included? Should the requirement state that securities of the same
type as those an FPI is registering in the United States must be listed
on a major foreign exchange?
31. Are there certain types of foreign trading markets that should
not be considered ``major'' for purposes of the FPI definition? For
example, should there be different treatment of trading in an OTC
market as opposed to trading on an exchange? Should we consider the
level of public information available about the trading activity and
oversight in the market when determining whether the market is
``major'' for purposes of the FPI definition?
32. In considering the appropriate criteria and process for
determining a ``major foreign exchange,'' it is likely that including
more detail and complexity will result in a more burdensome and time-
consuming undertaking for the Commission staff. If we propose a
requirement that FPIs must be listed on a ``major foreign exchange,''
how should we balance the need to make a detailed assessment about
which listings and exchanges satisfy the requirement with concerns
about imposing undue burdens on Commission resources? Due to the
burdens of such an assessment, the Commission may not be able to
respond quickly to any regulatory changes in such foreign exchanges.
What challenges would possible delays in re-assessment of any ``major
foreign exchanges'' pose to issuers and U.S. investors?
33. What would be the potential costs and benefits, including
impacts on efficiency, competition, and capital formation, to FPIs and
U.S. investors of adding a ``major foreign exchange'' requirement to
the FPI definition?
4. Commission Assessment of Foreign Regulation
Another approach on which we request feedback is whether to require
that each FPI be (1) incorporated or headquartered in a jurisdiction
that the Commission has determined to have a robust regulatory and
oversight framework for issuers and (2) be subject
[[Page 24252]]
to such securities regulations and oversight without modification or
exemption. Similar to the potential ``major foreign exchange''
requirement discussed above, the Commission could designate certain
foreign jurisdictions as meeting applicable criteria considered
indicative of robust securities regulation and oversight. This
requirement would necessitate that the Commission individually assess
the regulatory regimes of foreign jurisdictions on an ongoing basis to
determine if they meet certain regulatory standards that the Commission
deems adequate for the protection of U.S. investors. Such assessment
would require a high level of cooperation with foreign authorities and
determinations about the nature of their disclosure requirements, the
extent to which the Commission believes those foreign authorities'
regulations protect U.S. investors, and the effectiveness of their
enforcement programs, and would require the Commission staff to devote
significant time and resources to continuously monitor the particulars
of each relevant foreign regulatory regime.
For example, we could require that an FPI be incorporated and/or
headquartered in a jurisdiction where the FPI must file annual reports
with financial statements audited by an independent auditor and reports
disclosing interim financial results and material events,\111\ that has
liability provisions for material misstatements and omissions and an
effective enforcement mechanism, and that conducts regular reviews of
public filings. Such assessments could be determinative for all issuers
within a given jurisdiction or could be adjusted to account for
variations in the applicable regulation based upon the size, industry,
or listing venue of the issuer, allowing for a tailored approach that
could be used to minimize the burdens of duplicative regulatory
requirements on specific subsets of FPIs. This approach would be
effective only to the extent that the Commission and its staff would be
able to adequately assess a foreign jurisdiction's regulatory
requirements, which may be limited by the staff's expertise in foreign
laws, the transparency of those jurisdictions' rules, regulatory
actions, case law, and the ability to obtain sufficient cooperation
from foreign authorities. Furthermore, once the regulatory requirements
of a foreign jurisdiction have been assessed, any subsequent changes in
those requirements and resulting assessments that warrant a change in
the Commission's determination could be highly disruptive to issuers.
---------------------------------------------------------------------------
\111\ See supra note 95 and related discussion for examples of
home country jurisdictions with similar requirements, as well as
note 94 for examples of home country jurisdictions without similar
requirements.
---------------------------------------------------------------------------
Request for Comment
34. Should we permit an issuer to retain FPI status only if is
incorporated or headquartered in a jurisdiction that the Commission has
determined to have securities regulations and oversight sufficient to
protect U.S. investors? Should we require the issuer to be both
incorporated and headquartered in such a jurisdiction? Would that be
sufficient to protect U.S. investors and ensure that an issuer is
subject to meaningful home country regulations, or should we also
require an FPI to be registered/listed on an exchange in that
jurisdiction?
35. If the Commission designates certain jurisdictions as having
securities regulations and oversight sufficient to protect U.S.
investors, should we permit foreign issuers that have been granted
exemptions or accommodations from certain regulatory requirements by
their home country regulator to retain FPI status? How should we assess
whether an issuer is fully subject to the home country securities
regulations and oversight that the Commission has designated as
sufficient to protect U.S. investors? For example, should we require
FPIs to certify that they are subject to the securities regulations and
oversight of their home country regulator without modification or
exemption? If the home country regulator incorporates a scaled regime
that includes modifications to or exemptions from regulatory
requirements for certain subsets of issuers (e.g., the foreign issuer
is subject to modified regulatory requirements in its home country
jurisdiction due to being newly public or falling below a specified
market capitalization threshold), should we permit such issuers to take
advantage of FPI accommodations provided they adhere fully to the
applicable requirements of the home country jurisdiction?
36. How should we assess which jurisdictions have sufficient
regulatory regimes? More specifically, what standards should we apply
in assessing a foreign jurisdiction's regulatory regime for purposes of
FPI eligibility? Is it possible to develop an objective test for making
this determination? Are there key disclosures or other requirements
that the foreign jurisdictions should have in their securities
regulation for issuers in those jurisdictions to be eligible for the
Commission's FPI accommodations?
37. How often should we reassess the regulatory regimes of foreign
jurisdictions to ensure that U.S. investors in FPIs are protected? What
would be the impacts on issuers, investors and capital markets from
conducting such reassessment? How should we account for any lags in
time between when a foreign jurisdiction changes its regulatory
requirements and when our reassessment occurs pursuant to any review
cycle we adopt?
38. In considering the appropriate criteria and process for
determining whether a jurisdiction applies a robust regulatory and
oversight framework and whether a foreign issuer is subject to such
framework, it is likely that including more detail and complexity will
result in a more burdensome and time-consuming undertaking for the
Commission staff. If we propose such a requirement, how should we
balance the need to make the determination with concerns about imposing
undue burdens on Commission resources? Due to the burdens of such an
assessment, the Commission may not be able to respond quickly to any
regulatory changes in such foreign jurisdiction. What challenges would
possible delays in re-assessment of any foreign regulatory and
oversight framework pose to issuers and U.S. investors?
39. What would be the potential costs and benefits, including
impacts on efficiency, competition, and capital formation, to FPIs and
U.S. investors of adding a Commission assessment of foreign regulation
requirement to the FPI definition?
5. Mutual Recognition Systems
Another approach to tailor the FPI accommodations to the FPI
population would be to develop a system of mutual recognition, with
respect to Securities Act registration and Exchange Act periodic
reporting, for issuers from selected foreign jurisdictions. We
currently apply a limited mutual recognition approach for Canadian
issuers under the MJDS, which permits eligible U.S. and Canadian
issuers to conduct cross-border securities offerings and fulfill their
reporting requirements primarily by complying with, and using
disclosure documents prepared in accordance with, home country
securities regulations.\112\ The MJDS was established in part because
of the shared
[[Page 24253]]
investor protection goals and regulatory approaches of the U.S. and
Canadian regulatory regimes and because of the large number of Canadian
issuers accessing U.S. capital markets.\113\ Several other potential
mutual recognition systems were previously considered by the Commission
in 2008, including expanding the regulatory relationship with
Canada.\114\
---------------------------------------------------------------------------
\112\ The MJDS does not include deference on enforcement
matters. To use the MJDS, MJDS issuers must also consent to service
of process and appoint a U.S. person as agent for process, as well
as consent to service of an administrative subpoena and an
undertaking to assist the Commission in responding to inquiries made
by the Commission staff. See supra note 64.
\113\ Multijurisdictional Disclosure, Release No. 33-6841 (July
24, 1989) [54 FR 32226 (Aug. 4, 1987)] (noting the maturity of
Canadian capital markets and strength of regulatory tradition, the
common goal between United States and Canada of ``investor
protection through refined and developed disclosure systems for both
the primary and secondary markets,'' and the level of cooperation in
enforcement matters supported by the 1988 Memorandum of
Understanding); MJDS Adopting Release, supra note 8 (``Canada is the
logical first partner for the United States in such an initiative
because of the significant presence of Canadian companies in the
U.S. trading markets.''). The Commission has similarly used
comparability as a factor justifying substituted compliance in rules
under 15 U.S.C. 78m(q) (``section 13(q)'') regarding disclosure
pertaining to resource extraction. See Disclosure of Payments by
Resource Extraction Issuers, Release No. 34-90679 (Dec. 16, 2020)
[86 FR 4662 (Jan. 15, 2021)].
\114\ See Statement of the European Commission and the U.S.
Securities and Exchange Commission on Mutual Recognition in
Securities Markets (Feb. 1, 2008), available at https://www.sec.gov/news/press/2008/2008-9.htm; Schedule Announced for Completion of
U.S.-Canadian Mutual Recognition Process Agreement (May 29, 2008),
available at https://www.sec.gov/news/press/2008/2008-98.htm; Mutual
Recognition Arrangement Between the United States Securities and
Exchange Commission and the Australian Securities and Investments
Commission, together with the Australian Minister for Superannuation
and Corporate Law (Aug. 25, 2008), available at https://download.asic.gov.au/media/1346672/SEC_framework_arrangement_aug_08.pdf. See also Tafara, Ethiopis and
Robert J. Peterson, A Blueprint for Cross-Border Access to U.S.
Investors: A New International Framework, 48 Harv. Int'l L.J. 31
(2007).
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Mutual recognition systems are premised upon principles of mutual
benefit and reciprocity.\115\ While participant jurisdictions would be
expected to meet certain standards in their regulatory approaches,
their requirements would not need to be exactly the same as the
Commission's requirements for domestic issuers; they would need only to
offer comparable protections to U.S. investors. An advantage of mutual
recognition systems is that they can be tailored to suit the specific
jurisdiction and could continue evolving as necessary. In some cases,
foreign jurisdictions would need to undertake regulatory changes in
order to establish a mutual recognition system. A disadvantage of such
an approach is the time that it would take to assess jurisdictions on a
case-by-case basis.
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\115\ Wei, Tzung-bor. The Equivalence Approach to Securities
Regulation. 27 Nw. J. Int'l L. & Bus. 255, 282 (2006-2007).
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Request for Comment
40. Should we seek to establish an additional system for mutual
recognition with respect to Securities Act and Exchange Act
requirements for FPIs? If so, what would be key areas for such mutual
recognition? Are there impediments that would prevent this approach?
Are there any areas of issuer regulation and oversight that we should
not include in such a system?
41. Should any additional mutual recognition systems with respect
to Securities Act and Exchange Act requirements be specifically
tailored to each jurisdiction, or should we establish one umbrella
system that encompasses multiple jurisdictions? Is an umbrella system
feasible given the disparate regimes, regulations, and laws across
foreign jurisdictions?
42. Is the MJDS a good model for a new mutual recognition system
with respect to Securities Act and Exchange Act requirements? Are there
any issues regarding the MJDS relating to investor protection or
capital formation? Are there particular advantages to the MJDS that
should be replicated in any new mutual recognition system with respect
to Securities Act and Exchange Act requirements?
43. If we explore a new mutual recognition system with respect to
Securities Act and Exchange Act requirements, which jurisdictions
should we consider as possible candidates? How would U.S. investors
perceive the regulatory regimes of such jurisdictions in terms of
investor protection or confidence in this type of system? To what
extent would this approach address the concerns raised in this release?
44. What criteria should we use to determine whether a particular
jurisdiction's regulatory regime sufficiently shares investor
protection goals and regulatory approaches with the U.S. regime to
warrant mutual recognition with respect to Securities Act and Exchange
Act requirements?
45. If we adopt a new mutual recognition system, should we limit
the accommodations that can be relied upon by any FPIs that are not
included in the new mutual recognition system? If so, which
accommodations should be limited and why? Alternatively, should FPIs
that meet the current definition continue to benefit from the same FPI
accommodations while FPIs that are covered by the new mutual
recognition system be granted additional accommodations? If so, what
accommodations should we consider?
46. Determining whether a system of mutual recognition should be
established for a certain jurisdiction will likely create a burdensome
and time-consuming undertaking for the Commission staff. If we adopt a
new mutual recognition system, how should we balance the need to make
this determination with concerns about imposing undue burdens on
Commission resources? Due to the burdens of establishing a mutual
recognition system, the Commission may not be able to respond quickly
to any regulatory changes in such foreign jurisdiction. What challenges
would potential delays in the tailoring of any mutual recognition
system pose to issuers and U.S. investors?
47. What are the potential costs and benefits to FPIs and U.S.
investors, including impacts on efficiency, competition, and capital
formation, of establishing a new mutual recognition system with respect
to Securities Act and Exchange Act requirements? Is there any subset of
issuers or U.S. investors that would be disproportionately and/or
unintentionally affected by the creation of such a system?
6. International Cooperation Arrangement Requirement
We could require, as a criterion for FPI eligibility, that an FPI
certify that it is either incorporated or headquartered in, and subject
to the oversight of the signatory authority of, a jurisdiction in which
the foreign securities authority \116\ has signed the IOSCO \117\
Multilateral Memorandum of Understanding Concerning Consultation,
Cooperation, and the Exchange of Information (``MMoU'') or the Enhanced
MMoU (``EMMoU'').\118\
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\116\ 15 U.S.C. 78c(a)(50) (section 3(a)(50)) of the Exchange
Act defines a ``foreign securities authority'' as ``any foreign
government, or governmental body or regulatory organization
empowered by a foreign government to administer or enforce its laws
as they relate to securities matters.''
\117\ IOSCO is an association of the world's securities
regulators that develops, implements, and promotes internationally
recognized standards for financial markets regulation. Its
membership covers 130 jurisdictions and regulates more than 95% of
the world's securities markets. IOSCO's Objectives and Principles of
Securities Regulation are endorsed by both the G20 and the Financial
Stability Board and form the basis for the evaluation of the
securities sector for the Financial Sector Assessment Programs of
the International Monetary Fund (``IMF'') and the World Bank.
IOSCO's three main objectives are to enhance investor protection,
ensure markets are fair and efficient and promote financial
stability by reducing systemic risk. The Commission is an IOSCO
member.
\118\ The full text of the MMoU is available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD386.pdf; the full text of
the EMMoU is available at https://www.iosco.org/about/pdf/Text-of-the-EMMoU.pdf. As of Feb. 2025, there are 136 authorities that are
members of the MMoU (the full list is available at https://www.iosco.org/v2/about/?subSection=mmou&subSection1=signatories) and
27 authorities that have signed the EMMoU (the full list is
available at https://www.iosco.org/v2/about/?subSection=emmou&subSection1=signatories). The Commission is a
signatory to both the MMoU and EMMoU.
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[[Page 24254]]
While the MMoU is voluntary, non-binding, and does not supersede
domestic laws, IOSCO members that sign the MMoU are expressing their
intent and legal authority to assist other MMoU members in enforcement
matters, including the sharing of information in enforcement matters
involving FPIs. IOSCO screens prospective MMoU applicants to confirm
their legal authority to provide other MMoU members with such
assistance, in particular the ability to provide other MMoU members
with bank, brokerage, and beneficial ownership records.\119\
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\119\ See Appendix B, sections I and II to the MMoU.
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The EMMoU seeks to build on the MMoU and facilitate the provision
of a broader array of assistance among securities authorities in
enforcement matters, including the following categories of assistance:
obtaining and sharing audit information; compelling physical attendance
for testimony; freezing assets or advising on how to do so; and
obtaining and sharing certain subscriber and log information from
internet and telephone service providers and communications held by
regulated entities.
While the criteria for permitting an authority to sign the MMoU
(and EMMoU) primarily relate to an authority's ability to provide
information and other assistance to authorities investigating potential
violations of their securities laws and abide by the MMoU's/EMMoU's
provisions on confidentiality and use of information, the MMoU and
EMMoU do not require their signatories to have robust disclosure
requirements applicable to issuers in their jurisdictions. As such, the
MMoU and EMMoU are not a proxy for robust disclosure rules in the FPI's
home country or the FPI actually being subject to such rules.
The Commission regularly uses the MMoU and EMMoU to further its
mission of investor protection by obtaining and providing international
enforcement cooperation, including with respect to issuers. Because the
MMoU and EMMoU do not reflect the adequacy of signatories' securities
regulation or oversight, this requirement would likely function as a
complement to other regulatory responses discussed in section IV.\120\
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\120\ For example, several jurisdictions, such as the Cayman
Islands, British Virgin Islands, and Bermuda, are signatories to the
MMoU but appear to have limited current reporting requirements under
the rules of their home country jurisdictions. See supra note 92.
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Request for Comment
48. Should we permit issuers to retain FPI status only if they, in
addition to other eligibility criteria, certify that they are either
incorporated or headquartered in a jurisdiction in which the foreign
securities authority is a signatory to the IOSCO MMoU? What are the
advantages or disadvantages to this approach? Should we also require an
FPI to be registered/listed on an exchange in that jurisdiction to
ensure that an issuer is subject to regulations by the foreign
securities authority that is a signatory to the IOSCO MMoU?
49. Should we require that the foreign securities authority be a
signatory to the EMMoU, in addition to the MMoU?
50. Should we require the foreign securities authority to not only
have signed the MMoU and/or EMMoU, but also not have been suspended or
terminated from either arrangement by IOSCO?
51. Should the Commission consider alternative information-sharing
arrangements as a criterion for FPI eligibility? In particular, are
there other information-sharing arrangements that would provide
additional investor protection safeguards for U.S. investors in the
event that an FPI fails to comply with the requirements of the Federal
securities laws when accessing U.S. capital markets?
52. If we impose a MMoU/EMMoU signatory or similar requirement,
should the Commission require each FPI applicant to certify annually
that it is either incorporated or headquartered in a jurisdiction in
which the foreign securities authority is an MMoU/EMMoU signatory? If
so, how should the issuer make that certification?
53. What are the limitations of the MMoU/EMMoU in furthering the
goal of providing appropriate accommodations for certain foreign
issuers so that U.S. investors have these investment opportunities
while also but maintaining adequate protections for U.S. capital
markets participants?
54. What would be the potential costs and benefits, including
impacts on efficiency, competition, and capital formation, to FPIs and
U.S. investors of adding a MMoU/EMMoU signatory or similar requirement
to the FPI definition?
C. Other Considerations
We recognize that amending the current FPI definition may involve
incorporating elements of several of the potential regulatory responses
set forth above, as well as careful consideration of any anticipated
consequences. We welcome any comments on the additional questions
outlined below as well as any other relevant consideration that we
should keep in mind as we evaluate the FPI definition.
Request for Comment
55. If we amend the FPI definition, issuers that lose FPI status
would become subject to the requirements for domestic issuers. This may
mark a significant change in reporting and other regulatory
requirements, with such issuers no longer being able to avail
themselves of the FPI accommodations discussed in section II.B above.
Each additional requirement imposed on former FPIs would involve costs
and benefits. Which of these additional requirements are likely to be
most burdensome to issuers that lose FPI status? Which are likely to be
most beneficial to investors? Given the extent of possible changes,
what data or analyses should we consider as part of our assessment of
the potential costs and benefits of an issuer transitioning out of FPI
status?
56. If we amend the FPI definition, some issuers that lose FPI
status may choose to change their listing, ownership, or other elements
to access alternative non-U.S. markets or to regain FPI status rather
than comply with all the requirements to which domestic issuers are
subject. What are the most likely alternative markets that such issuers
would access, or the most likely changes that such issuers would make?
What characteristics distinguish the issuers that are likely to react
to an amended FPI definition in these ways? Which of the alternatives
discussed in this release would be most likely to result in such
reactions? What are the primary factors that would guide the decisions
of such issuers?
57. U.S. investors can trade in equities in non-U.S. markets,
though perhaps without the same ease as they can trade in U.S. markets.
What are the frictions to such trading? To what degree would U.S.
investors continue to invest in issuers that lose FPI status if they
gave up their U.S. listing or registration? Would FPIs that are
currently exclusively listed in U.S. capital markets pursue alternative
non-U.S. listings of their securities upon losing their FPI status
rather than report as domestic issuers, thereby making it
[[Page 24255]]
difficult for current and future U.S. investors to trade in such FPIs'
securities?
58. Are there other considerations we should take into account
pertaining to relations with foreign regulators and conflict of laws in
connection with potential changes to the FPI definition?
59. FPIs may present financial statements pursuant to U.S. GAAP,
IFRS as issued by the IASB without reconciliation to U.S. GAAP, or home
country GAAP with a reconciliation to U.S. GAAP. If the FPI definition
were revised, any issuers that would lose FPI status would be required
to present their financial statements pursuant to U.S. GAAP, as is
required for domestic issuers. There is currently no guidance for the
transition from IFRS as issued by the IASB to U.S. GAAP. This
transition in financial reporting could be burdensome and costly. What
would be the costs and complexities in transitioning to U.S. GAAP? What
would be the benefits of transitioning to U.S. GAAP? In light of
potential costs and complexities, are there specific financial
reporting accommodations that should be provided to former FPIs? For
example, should a transition period be provided and, if so, for how
long? Should we reduce the number of years of financial statements
required to be presented during the transition period or require
application of U.S. GAAP only in future periods with transition
provisions such as an opening balance sheet? Would any other
accommodations be appropriate and how would their benefits and costs
compare?
60. Are there any subsets of the current FPI population that should
not be subject to any additional disclosure or other requirements that
these issuers may incur due to any amendments to the FPI definition?
Please explain which and why. Alternatively, should any such subsets of
the current FPI population be given a longer transition period and
other transition accommodations if they lose FPI status due to any
amendments to the FPI definition?
61. Should amendments to the FPI definition apply to reporting FPIs
only and not to the FPIs who are exempt from section 12(g) registration
pursuant to either Rule 12g3-2(a) or Rule 12g3-2(b)? Are there
different amendments that we should consider for these foreign issuers
as opposed to reporting FPIs? In some cases, the securities of non-
reporting FPIs are listed in the United States through the market
activities of certain intermediaries such as depositaries engaged in
creating ADRs without involvement by the non-reporting FPIs.\121\
Amendments to the FPI definition may result in depositaries finding it
more difficult to establish unsponsored ADR programs as fewer foreign
issuers may be eligible to rely on Rule 12g3-2(b) due to loss of FPI
status. Would amending the FPI definition unduly restrict the ADR
market?
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\121\ See Rule 12g3-2(b), supra note 59. Rule 12g3-2(b)(2)
exempts an eligible FPI from the requirement to register a class of
equity securities under section 12(g) if the issuer maintains a
foreign listing and makes certain information available in English
on its website or through an electronic information delivery system
generally available to the public in its primary trading market.
Securities of FPIs that are exempt under Rule 12g3-2(b) may be held
on deposit and traded in the United States as ADRs.
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62. Would changing the FPI definition have a foreseeable impact in
the number of foreign issuers that choose to trade on the U.S. OTC
markets instead of on a U.S. exchange? If we adopt an amendment to the
FPI definition, it would also affect eligibility for the exemptions
under Rule 12g3-2(a) and Rule 12g3-2(b) and foreign issuers that are no
longer eligible to rely upon FPI exemptions from reporting could become
subject to domestic issuer reporting obligations if their securities
trade on the U.S. OTC markets. Would such issuers be more likely to
pursue a listing on an exchange rather than on the U.S. OTC markets?
Are investors likely to see potential consequences from any related
shift in where such issuers are trading?
63. If we adopt an amendment to the FPI definition but retain the
current FPI definition solely with regards to the exemptions under Rule
12g3-2(a) and Rule 12g3-2(b), would foreign issuers be more likely to
trade their securities on the U.S. OTC markets rather than seeking and
maintaining compliance with a new eligibility requirement? What impacts
would U.S. investors be likely to experience as a result of such a
shift?
64. Should we combine any of the potential regulatory responses
described in this section IV? If so, which ones and why? What would be
the economic effects of combining such responses for FPIs and U.S.
investors?
65. Are there any other regulatory responses not discussed in this
concept release that we should consider given the recent developments
in the FPI population as described in section III, whether alone or in
addition to any of those discussed? What would be the potential costs
and benefits, including impacts on efficiency, competition, and capital
formation, to FPIs and U.S. investors of any such other regulatory
responses?
66. Should any of the potential regulatory responses described in
this section IV, in particular sections IV.B.2-4 and IV.B.6, be
required only if the foreign issuer must apply the business contacts
test, and not if the foreign issuer meets the shareholder test?
67. What would be the competitive effects for domestic and foreign
issuers as well as U.S. capital markets of amending the FPI definition
using one or more of the regulatory responses described in this section
IV?
68. The FPI definition is currently similar to, but not the same
as, the definition of a ``foreign business'' under Rule 1-02(l) of
Regulation S-X.\122\ Should any change to the FPI definition also
result in changes to the definition of a ``foreign business''?
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\122\ 17 CFR 210.1-02(l) of Regulation S-X defines ``foreign
business'' as ``A business that is majority owned by persons who are
not citizens or residents of the United States and is not organized
under the laws of the United States or any State thereof, and
either: (1) More than 50 percent of its assets are located outside
the United States; or (2) The majority of its executive officers and
directors are not United States citizens or residents.'' Qualifying
acquired foreign businesses benefit from certain accommodations
under Regulation S-X, including following requirements applicable to
FPIs when presenting financial statements.
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69. Should we consider applying any change to the FPI definition
only to new FPIs registering for the first time to eliminate the
transition costs for the current FPI population? What would be the
competitive effects for domestic issuers and existing FPIs of such an
accommodation? Should existing FPIs be permitted to rely on the current
FPI eligibility requirements indefinitely or be subjected to any
changes to the FPI definition after a certain transition period, and,
if so, what should that period be?
V. Regulatory Planning and Review
This concept release and request for comments is a significant
regulatory action under Executive Order 12866 and has been reviewed by
the Office of Management and Budget.
VI. Conclusion
We are interested in the public's views regarding the matters
discussed in this concept release. We recognize that the public
interest is served when U.S. investors have more opportunities to
invest in a variety of securities, including foreign issuers'
securities, and, in this regard, want to continue to facilitate U.S.
investors' access to those investment opportunities. At the same time,
we believe it is important to reassess whether the current FPI
definition adequately reflects today's FPI population and is serving
its
[[Page 24256]]
intended function. We encourage all interested parties to submit
comments on these topics. If possible, please reference the specific
question numbers or sections of this release when submitting comments.
In addition, we solicit comments on any other aspect of foreign issuer
securities regulation that commenters believe may be improved. Please
be as specific as possible in your discussion and analysis of any
additional issues.
By the Commission.
Dated: June 4, 2025.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2025-10428 Filed 6-6-25; 8:45 am]
BILLING CODE 8011-01-P