Daily Rules, Proposed Rules, and Notices of the Federal Government
We are adopting amendments to Commission Rule 30-1,
In December 2005, the Commission issued proposed amendments to its current rules governing when a foreign private issuer
We recognize that U.S. investors benefit from the investment opportunities provided by foreign private issuers registering their securities with the Commission and listing and publicly offering those securities in the United States. However, because of the burdens and uncertainties associated with terminating registration and reporting under the Exchange Act, the current exit process may serve as a disincentive to foreign private issuers accessing the
As originally proposed, new Exchange Act Rule 12h-6 would have permitted a foreign private issuer of equity securities to terminate its Exchange Act registration and reporting obligations if, among other conditions, it met one of a set of alternative quantitative benchmarks that, depending on whether the issuer was a well-known seasoned issuer (“WKSI”),
In light of these criticisms, we reconsidered our approach and, in December 2006, we reproposed the amendments to the Exchange Act exit rules for foreign private issuers.
We received 30 comment letters in response to the reproposed rule amendments.
We received the most comments concerning the reproposed trading volume benchmark for equity securities issuers. Numerous commenters urged us to adopt a quantitative benchmark that would require an issuer to measure its U.S. ADTV as a percentage of its ADTV for the same class of securities on a worldwide basis, rather than against its ADTV in its primary trading market, as reproposed. Many commenters also requested that we permit an issuer to include off-market transactions when calculating its worldwide ADTV for a class of equity securities, rather than only when calculating its U.S. ADTV, as reproposed. Some commenters further urged us to permit an issuer to include trades conducted through alternative trading systems when determining whether it meets the proposed trading volume benchmark. Still others requested that we increase the percentage in the trading volume-based measure to a percentage greater than 5 percent, as reproposed, particularly if we did not move to a worldwide ADTV standard.
Commenters expressed concern or requested guidance regarding a number of other issues, including:
• the appropriateness of the proposed provision that would prohibit reliance on the trading volume standard if an issuer has delisted its securities from a U.S. exchange during the preceding 12 months when its U.S. ADTV exceeded the 5 percent threshold;
• the appropriateness of the proposed provision that would prohibit reliance on the trading volume standard if an issuer has terminated a sponsored American Depositary Receipts (ADR) facility
• whether to include convertible debt and other equity-linked securities in the definition of equity security for purposes of the new exit rule;
• whether a special financial report filed pursuant to Exchange Act Rule 15d-2
• the appropriateness of the reproposed dormancy condition for equity securities registrants,
• the appropriateness of the reproposed foreign listing condition for equity securities registrants,
• the role of a predecessor in determining a successor issuer's eligibility to terminate its Exchange Act reporting obligations under reproposed Rule 12h-6, including whether, under Exchange Act Rule 12g-3(g),
• whether to permit a foreign company that filed a Form 15 previously to terminate or suspend its Exchange Act reporting obligations regarding a class of equity securities before the effectiveness of new Rule 12h-6 to terminate its reporting obligations under the new exit rule without having to recount its holders, as long as it meets that rule's trading volume benchmark;
• whether to increase the threshold number of record holders in the debt securities provision; and
• whether an issuer that has filed a Form 15F
We have carefully considered commenters' concerns regarding the reproposed rules, and have addressed many of them in the rule amendments that we are adopting today. As adopted, new Exchange Act Rule 12h-6 and the accompanying rule amendments will:
• permit a foreign private issuer, regardless of size, to terminate its Exchange Act registration and reporting obligations regarding a class of equity securities, assuming it meets all the other conditions of Rule 12h-6, if, for a recent 12-month period, the U.S. ADTV of the subject class of securities has been no greater than 5 percent of its worldwide ADTV—rather than 5 percent of the ADTV in its primary trading market, as reproposed;
• permit an issuer to include off-market transactions, including transactions through alternative trading systems, when calculating its worldwide ADTV for a class of equity securities—as discussed in connection with calculating its U.S. ADTV, as reproposed—as long as the trading volume information regarding the off-market transactions is reasonably reliable and does not duplicate other trading volume information regarding the subject class of securities;
• require an issuer to wait 12 months before filing its Form 15F in reliance on the trading volume standard if the issuer has delisted its class of equity securities from a national securities exchange or automated inter-dealer quotation system in the United States,
• retain the 300-holder standard as an alternative to the trading volume standard for an equity securities issuer and as the quantitative standard for a debt securities issuer, as reproposed;
• exclude convertible debt and other equity-linked securities from the definition of equity security for the purpose of new Rule 12h-6's trading volume provision;
• require an equity securities registrant to have at least one year of Exchange Act reporting, be current in reporting obligations for that period, and have filed at least one Exchange Act annual report, as reproposed;
• permit an issuer to count a special financial report filed pursuant to ExchangeAct Rule 15d-2 as an Exchange Act annual report for the purpose of the new rule's prior reporting condition;
• prohibit an issuer of equity securities from selling securities in the UnitedStates in a registered offering under the Securities Act, except as specified, during the 12 months preceding the filing of its Form 15F (the “dormancy condition”), substantially as reproposed;
• require an issuer of equity securities to have maintained a listing of the subject class of securities for at least the 12 months preceding the filing of itsForm 15F on one or more exchanges in a foreign jurisdiction that, either singly or together with the trading of the same class of the issuer's securities in another foreign jurisdiction, constitutes the primary trading market for those securities, substantially as reproposed;
• define primary trading market to mean that at least 55 percent of the trading in a foreign private issuer's class of securities that is the subject of Form 15F took place in, on or through the facilities of a securities market or markets in a single foreign jurisdiction or in no more than two foreign jurisdictions during a recent 12-month period, as long as the trading in at least one of the two foreign jurisdictions is larger than the trading in the United States for the same class of the issuer's securities;
• permit an equity securities issuer relying on the alternative 300-holder standard, or a debt securities issuer, to use a revised counting method that limits the inquiry regarding the amount of securities represented by accounts of customers resident in the United States to brokers, dealers, banks and other nominees located in the United States, the foreign private issuer's jurisdiction of incorporation, legal organization or establishment, and the one or two jurisdictions comprising the issuer's primary trading market if different from the issuer's jurisdiction of incorporation, legal organization or establishment, as reproposed;
• permit an issuer of equity or debt securities to rely on the assistance of an independent information services provider when determining whether the issuer falls below the 300-holder standard, as reproposed;
• permit a successor issuer meeting specified conditions to terminate itsExchange Act reporting obligations under new Rule 12h-6, as reproposed;
• permit a foreign private issuer that filed a Form 15 and suspended or terminated its Exchange Act reporting obligations under the current exit rules before the effective date of Rule 12h-6 to terminate its Exchange Act reporting obligations under new Exchange Act Rule 12h-6, as long as, if regarding a class of equity securities, the issuer meets Rule 12h-6's listing condition and either the trading volume or alternative-300 holder condition or, if regarding a class of debt securities, the issuer meets the rule's 300-holder condition for debt issuers;
• extend the Rule 12g3-2(b) exemption to a foreign private issuer of equity securities, including a successor issuer and prior Form 15 filer, immediately upon its termination of reporting under Rule 12h-6, and require the issuer to maintain that exemption by publishing in English specified material home country documents required by
• permit a non-reporting company that has received or will receive the Rule 12g3-2(b) exemption, upon application to the Commission and not pursuant to Rule 12h-6, to publish its “ongoing” home country documents required under Rule 12g3-2(b) on its Internet Web site or through an electronic information delivery system rather than submit them in paper to the Commission; and
• permit an issuer that has filed a Form 15F to terminate its Exchange Act reporting obligations regarding a class of debt securities to establish the Rule 12g3-2(b) exemption for a class of equity securities upon the effectiveness of its termination of reporting under Rule 12h-6, by submitting an application for the Rule 12g3-2(b) exemption after filing its Form 15F.
We are also adopting, as reproposed, procedural conditions that will:
• require a foreign private issuer to file a Form 15F providing information with respect to whether the issuer meets the requirements for terminating its reporting obligations under Rule 12h-6;
• automatically suspend an issuer's Exchange Act reporting obligations upon the filing of its Form 15F and trigger a 90-day waiting period at the end of which, assuming the Commission has no objections, the suspension will become a termination of reporting; and
• require a foreign private issuer to publish a notice, such as a press release, announcing its intention to terminate its Exchange Act reporting obligations under Rule 12h-6, before or at the time of filing its Form 15F.
We believe the rules that we are adopting today provide meaningful protection of U.S. investors by permitting the termination of Exchange Act registration and reporting only by those foreign registrants with relatively low U.S. market interest in their U.S.-registered securities. Compared to the current exit rules, Rule 12h-6 will establish a more clearly defined process with a more appropriate benchmark by which a foreign private issuer can terminate its Exchange Act reporting obligations. As a result, we believe foreign private issuers should be more willing initially to register their securities with the Commission, which will provide more investment choices for U.S. investors.
At the same time, we believe the conditions that determine a foreign private issuer's eligibility to terminate its Exchange Act registration and reporting regarding a class of equity securities under new Rule 12h-6 will serve to protect U.S. investors. For example, the prior reporting condition
The foreign listing condition and U.S. trading volume benchmark support our view that, before a foreign private issuer may terminate its Exchange Act reporting obligations under Rule 12h-6, it must have been subject to an ongoing disclosure and financial reporting regime, and have a significant market following, in its primary trading market. We have set the U.S. trading volume benchmark at such a level that, although there may be some U.S. investor interest in the subject securities of an issuer meeting the benchmark, that interest would appear to be sufficiently diminished so that a foreign private issuer should not be required to continue its Exchange Act reporting if it determines that it is no longer desirable to continue as a U.S. registrant.
The condition restricting the ability of an issuer to rely on the trading volume standard under specified circumstances (U.S. delisting and termination of a sponsored ADR facility) should deter an issuer from excluding U.S. investors, particularly retail investors, from investing in their securities when U.S. market interest is still significant. The immediate availability of the exemption under Rule 12g3-2(b) will foster access by U.S. investors to ongoing home country information about an issuer after it terminates its Exchange Act registration and reporting under Rule 12h-6. Finally, the conditions relating to the filing of Form 15F and the publication of a press release or other notice will promote transparency in the exit process.
As adopted, new Exchange Act Rule 12h-6 will enable a foreign private issuer of equity securities, regardless of size, to qualify for termination of its Exchange Act reporting by meeting a quantitative benchmark provision that does not depend on the number of its U.S. record holders or the percentage of its securities held by those holders. Under new Rule 12h-6, an issuer will be able to terminate its Exchange Act registration and reporting obligations regarding a class of equity securities, assuming it meets the other conditions of Rule 12h-6, if the ADTV of the subject class of equity securities in the United States has been 5 percent or less of the ADTV of that class of securities on a worldwide basis during a recent 12-month period.
A threshold matter in this regulatory initiative has been what is the most appropriate benchmark for equity securities that would best serve the interests of investors and issuers, and most commenters addressed this issue. Most of the commenters agreed that a benchmark based solely on trading volume is superior to one based on a combination of U.S. public float and trading volume criteria or just U.S. public float data, as under the originally proposed Rule 12h-6, or one based on the number of record holders in the United States or on a worldwide basis, as under the current exit rules. Most commenters stressed that trading volume data is easier to obtain and confirm than is the data required for a U.S. public float or record holder determination.
Some commenters supported the reproposed trading volume measure because it would provide a simple and clear measure of the degree of U.S. market interest in an issuer's equity securities.
Commenters expressed their belief that adoption of the reproposed trading volume standard would enable significantly more foreign private issuers to exit the Exchange Act reporting regime if they so desire.
For the above reasons, we are adopting a quantitative exit standard for equity securities registrants based solely on trading volume instead of one based on a combination of trading volume and public float criteria or just public float data. We also are adopting, as reproposed, one trading volume standard that will apply to all issuers of equity securities. Commenters generally supported having one benchmark applicable to any foreign private issuer, regardless of size.
Numerous commenters requested that the Commission calculate U.S. trading volume as a percentage of worldwide trading volume rather than as a percentage of ADTV in the issuer's primary trading market,
Some commenters maintained that, while it is reasonable to base Rule 12h-6's foreign listing condition on the reproposed primary trading market definition, it is not so for the trading volume benchmark.
We agree that, in light of the number of foreign registrants that have listings in more than two jurisdictions, and given the purpose of the trading volume benchmark, measuring an issuer's U.S. ADTV as a percentage of its worldwide ADTV would increase the likelihood of obtaining a more accurate measure of relative U.S. market interest for that issuer's equity securities. Therefore, we are adopting a trading volume benchmark for new Rule 12h-6 that will require an issuer to use as the denominator of its trading volume calculation its worldwide ADTV for the subject class of securities.
We reproposed to require an issuer to include both transactions occurring on a stock exchange and over-the-counter trades for the purpose of calculating U.S. ADTV for the numerator of the trading volume benchmark, but to include only on-exchange transactions for the purpose of calculating its ADTV for the denominator (its primary trading market, as reproposed). We did so based on our belief that trading volume information about over-the-counter trades was more readily available in the United States than in many foreign jurisdictions.
Some of these commenters urged the Commission to permit an issuer to include not only off-market transactions that currently occur through traditional over-the-counter means, but those that may occur through alternative trading systems.
Some commenters requested that, if the Commission does not permit an issuer to include off-market transactions when determining its worldwide trading volume for the denominator of its trading volume calculation, it should also prohibit the inclusion of off-market transactions when determining its U.S. ADTV for the numerator of that calculation.
These comments have persuaded us that, for at least some foreign private issuers, information regarding off-exchange transactions in non-U.S. jurisdictions will be readily obtainable. Therefore, under adopted Rule 12h-6, when making its trading volume determination, an issuer must include in its calculation of U.S. ADTV both on-exchange and off-exchange transactions, as reproposed. For both on-exchange and off-exchange transactions in the United States, we expect an issuer to be able to obtain relevant trading volume information as reported pursuant to an effective transaction reporting plan,
In response to our request for comments on whether issuers should be required to obtain trading volume data from particular sources, a number of commenters advocated that the final rules provide issuers with sufficient flexibility to use such data sources as they deem reliable and appropriate.
Commenters expressed a variety of views on whether 5 percent U.S. ADTV was the appropriate threshold for the trading volume benchmark. Although some commenters requested that the Commission increase the percentage to 10 percent ADTV,
We believe that adoption of the “5 percent of worldwide trading volume” standard will permit foreign companies with relatively little U.S. market interest to deregister.
We reproposed that, for purposes of new Rule 12h-6, an issuer would use the definition of equity security provided in Exchange Act Rule 3a11-1.
We agree with those commenters that, because trading volume information concerning convertible debt and other equity-linked securities is more difficult to obtain than trading volume information for the underlying equity securities, an issuer should not have to include equity-linked securities when determining whether it meets the trading volume benchmark. The same reasoning applies to an issuer's determination concerning the foreign listing condition, which requires an issuer to meet the definition of primary trading market, which is a trading volume-based definition.
• any debt security that is convertible into an equity security, with or without consideration;
• any debt security that includes a warrant or right to subscribe to or purchase an equity security;
• any such warrant or right; or
• any put, call, straddle, or other option or privilege that gives the holder the option of buying or selling a security but does not require the holder to do so.
We are adopting, substantially as proposed, a condition to the use of Rule 12h-6's trading volume standard and corresponding eligibility to file Form 15F. This condition provides that if a foreign private issuer has had its equity securities delisted from a registered national securities exchange or automated inter-dealer quotation system within one year before filing the Form 15F, it must have satisfied the trading volume percentage as of the date of delisting, as measured over the 12 months preceding the date of delisting.
• a listed foreign private issuer that satisfied the trading volume condition will be able to delist from its stock exchange and terminate its Exchange Act registration and reporting obligations concurrently; and
• a listed foreign private issuer that did not satisfy the trading volume condition will be able to delist but will not be eligible to file a Form 15F and terminate its Exchange Act registration and reporting obligations until one year after the date of delisting, assuming that, at that time, it meets the conditions of the rule.
We are adopting this condition in order to prevent the new trading volume-based rule from creating an incentive for a foreign private issuer to delist its securities from a U.S. exchange for the purpose of decreasing its U.S. trading volume. As one commenter suggested early on, if we were to adopt a standard based solely on trading volume, a foreign private issuer that delisted its securities from a U.S. exchange before its trading volume fell below the applicable percentage should not be eligible to terminate its registration under such a standard.
A few commenters requested that the Commission remove this delisting condition on the grounds that it imposed a restraint on the use of the new exit rule that was not necessary for the protection of U.S. investors.
As part of the rule reproposal, we proposed an additional condition to an issuer's use of Rule 12h-6 and eligibility to file Form 15F in reliance on the trading volume provision. That condition provided that a foreign private issuer must not have terminated any sponsored ADR facility within the 12 month period before filing its Form 15F. We proposed that condition in order to encourage foreign private issuers to maintain their ADR facilities, even after they delist from a U.S. market and terminate their Exchange Act reporting obligations.
After a foreign private issuer delists and deregisters, investors will benefit if its ADRs continue to be traded in the over-the-counter market in the United States. The termination of ADR facilities has a detrimental impact on holders, imposing fees and other charges on investors and, when investors are cashed out, subjecting investors to unplanned tax consequences and limiting their investment choices.
Some commenters opposed the ADR facility termination condition on grounds similar to those raised against the delisting condition. However, these commenters also objected to the fact that, unlike the delisting condition, the proposed ADR facility condition applied regardless of whether, at the time of termination of its ADR facility, an issuer met the trading volume threshold measured for the previous 12 months.
We continue to believe that, due to the importance of ADR facilities for U.S. investors, a sponsored ADR facility termination condition is appropriate. However, we agree with commenters that the importance of this concern significantly diminishes if, at the time of its termination of a sponsored ADR facility, an issuer's U.S. ADTV has already fallen below the trading volume threshold.
Therefore, we are adopting a condition providing that, if an issuer has terminated a sponsored ADR facility, and at the time of termination the average daily trading volume in the United States of the ADRs exceeded 5 percent of the average daily trading volume of the underlying class of securities on a worldwide basis for the preceding 12 months, the issuer must wait 12 months before it may file a Form 15F to terminate its Exchange Act reporting obligations in reliance on Rule 12h-6's trading volume provision.