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Daily Rules, Proposed Rules, and Notices of the Federal Government

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 232, 240 and 249

[Release No. 34-55540; International Series Release No. 1301; File No. S7-12-05]

RIN 3235-AJ38

Termination of a Foreign Private Issuer's Registration of a Class of Securities Under Section 12(g) and Duty To File Reports Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934

AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
SUMMARY: We are adopting amendments to the rules that govern when a foreign private issuer may terminate the registration of a class of equity securities under section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act") and the corresponding duty to file reports required under section 13(a) of the Exchange Act, and when it may cease its reporting obligations regarding a class of equity or debt securities under section 15(d) of the Exchange Act. Under the current rules, a foreign private issuer may find it difficult to terminate its Exchange Act registration and reporting obligations despite the fact that there is relatively little interest in the issuer's U.S.-registered securities among United States investors. Moreover, currently a foreign private issuer can only suspend, and cannot terminate, a duty to report arising under section 15(d) of the Exchange Act. New Exchange Act Rule 12h-6 will permit a foreign private issuer of equity securities to terminate its reporting obligations under either section 13(a) or section 15(d) of the Exchange Act by meeting a quantitative benchmark designed to measure relative U.S. market interest for its equity securities that does not depend on a head count of the issuer's U.S. security holders. The new rule will permit a foreign private issuer to compare the average daily trading volume of its securities in the United States with its worldwide average daily trading volume, using a 5 percent benchmark. The accompanying rule amendments will also help provide U.S. investors with ready access through the Internet on an ongoing basis to material information about a foreign private issuer of equity securities that is required by its home country after it has exited the Exchange Act reporting system. The new rule will also permit a foreign private issuer of debt securities to terminate, rather than merely suspend, its section 15(d) reporting obligations.
DATES: Effective Date:June 4, 2007.
FOR FURTHER INFORMATION CONTACT: Elliot Staffin, Special Counsel, at (202) 551-3450, in the Office of International Corporate Finance, Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION:

We are adopting amendments to Commission Rule 30-1,1 Rule 1012 of Regulation S-T,3 and Rules 12g3-2, 12g-4 and 12h-34 under the Exchange Act,5 and adding new Rule 12h-66 and Form 15F7 under the Exchange Act.

117 CFR 200.30-1.

217 CFR 232.101.

317 CFR 232.10et seq.

417 CFR 240.12g3-2, 240.12g-4 and 240.12h-3.

515 U.S.C. 78aet seq.

617 CFR 240.12h-6.

717 CFR 249.324.

Table of Contents I. Executive Summary and Background A. Introduction B. Principal Comments Regarding the Reproposed Rule Amendments C. Summary of the Adopted Rule Amendments II. Discussion A. Conditions for Equity Securities Issuers 1. Quantitative Benchmarks a. Trading Volume Benchmark i. Calculation of the U.S. Trading Volume Benchmark as a Percentage of Worldwide Trading Volume Instead of Primary Trading Market Trading Volume ii. Inclusion of Off-Market Transactions in the Trading Volume Calculation iii. The 5 Percent Trading Volume Measure iv. Definition of Equity Securities v. One Year Ineligibility Period After Delisting vi. One Year Ineligibility Period After Termination of Sponsored ADR Facility vii. Transition Period b. Alternative 300-Holder Condition 2. Prior Exchange Act Reporting Condition 3. The One Year Dormancy Condition 4. Foreign Listing Condition B. Debt Securities Provision C. Revised Counting Method D. Expanded Scope of Rule 12h-6 1. Application of Rule 12h-6 to Successor Issuers 2. Application of Rule 12h-6 to Prior Form 15 Filers E. Public Notice Requirement F. Form 15F G. Amended Rules 12g-4 and 12h-3 H. Amendment Regarding the Rule 12g3-2(b) Exemption 1. Extension of the Rule 12g3-2(b) Exemption Under Rule 12g3-2(e) 2. Electronic Publishing of Home Country Documents I. Concerns Regarding Securities Act Rule 701 III. Paperwork Reduction Act Analysis IV. Cost-Benefit Analysis V. Consideration of Impact on the Economy, Burden on Competition and Promotion of Efficiency, Competition and Capital Formation Analysis VI. Regulatory Flexibility Act Certification VII. Statutory Basis and Text of Rule Amendments I. Executive Summary and Background A. Introduction

In December 2005, the Commission issued proposed amendments to its current rules governing when a foreign private issuer8 may exit the Exchange Act reporting regime.9 Under the current rules, the primary determinant regarding whether a foreign private issuer may terminate its registration of a class of securities under section 12(g)10 or suspend its reporting obligations under section 15(d)11 is if its subject securities are held of record by less than 300 residents in the United States.12 The Commission proposed to amend these rules out of concern that, due to the increased globalization of securities markets in recent decades as well as other trends, it has become difficult for a foreign private issuer to exit the Exchange Act reporting system even when there is relatively little U.S. investor interest in its U.S.-registered securities.13

8See the definition of foreign private issuer at Exchange Act Rule 3b-4(c) (17 CFR 240.3b-4(c)).

9Release No. 34-53020 (December 23, 2005), 70 FR 77688 (December 30, 2005) (Original Proposing Release).

10This statutory section applies to equity securities only. See Exchange Act Section 12(g)(1) [15 U.S.C. 78l(g)(1)].

1115 U.S.C. 78o(d). The effectiveness of a registration statement under the Securities Act of 1933 (“Securities Act”) triggers Section 15(d) reporting obligations. That section provides that an issuer cannot suspend its reporting obligations unless the subject class of securities is held of record by less than 300 persons at the beginning of a fiscal year other than the year in which the Securities Act registration statement became effective. Section 15(d) does not permit an issuer to terminate, but only to suspend, its reporting obligations under that section.

12Exchange Act Rules 12g-4(a)(2)(i) (17 CFR 240.12g-4(a)(2)(i)) and 12h-3(b)(2)(i) (17 CFR 240.12h-3(b)(2)(i)).

13See Original Proposing Release, 70 FR at 77689-77690.

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 theU.S. public capital markets.14 In order to remove this disincentive, we proposed to amend the current Exchange Act exit rules for foreign private issuers.

14See Part I.C of the Original Proposing Release for a discussion of the concerns raised by foreign private issuers regarding the current Exchange Act exit regime.

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”),15 was based either on a combination of U.S. trading volume and U.S. public float criteria or just U.S. public float data.16 However, numerous commenters stated that the originally proposed rules would still unduly restrict a significant portion of U.S.-registered foreign private issuers from exiting the Exchange Act reporting regime, thus making it unlikely that the proposed rules would achieve their purpose of attracting more foreign companies to U.S. public capital markets.

15For purposes of proposed Rule 12h-6, a “well-known seasoned issuer” meant a well-known seasoned issuer as defined in Securities Act Rule 405 (17 CFR 230.405), which would have required the worldwide market value of an issuer's outstanding voting and non-voting common equity held by non-affiliates to be $700 million or more.

16Under the original rule proposal, a WKSI would have been eligible to terminate its Exchange Act reporting obligations regarding a class of equity securities if the U.S. average daily trading volume (“ADTV”) of the subject class of securities had been no greater than 5 percent of the ADTV of that class of securities in its primary trading market during a recent 12 month period, and U.S. residents held no more than 10 percent of the issuer's worldwide public float as of a specified date. A WKSI with greater than 5 percent U.S. ADTV or a non-WKSI would have been eligible for termination of reporting regarding a class of equity securities if, regardless of U.S. trading volume, U.S. residents held no more than 5 percent of the issuer's worldwide public float as of a specified date. See Part II.B.2.d of Release No. 34-53020.

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.17 As an alternative to the record holder standard for equity securities issuers, we proposed a quantitative benchmark based solely on a comparison of the average daily trading volume of a foreign private issuer's equity securities in the United States with that in its primary trading market. We reasoned that a standard based on trading volume may in fact be superior to the originally proposed standard, which was based primarily on a comparison of an issuer's U.S. public float with its worldwide public float, because it is a more direct measure of the issuer's nexus with the U.S. market and because trading volume data is easier to obtain than public float or record holder data.18 We concluded that, in applying an exit standard based on trading volume data for the U.S. and an issuer's primary trading market, issuers would face reduced costs when determining whether they can terminate their registration and reporting obligations under the Exchange Act, compared to the originally proposed standards that would have required an issuer to assess the U.S. residence of its security holders.19

17Release No. 34-55005 (December 22, 2006), 72 FR 1384 (January 11, 2007) (Reproposing Release).

18We reproposed the rule amendments primarily because the Commission did not fully address this trading volume approach in the Original Proposing Release.

19See Parts II.A.1.a and IV of the Reproposing Release.

B. Principal Comments Regarding the Reproposed Rule Amendments

We received 30 comment letters in response to the reproposed rule amendments.20 These letters represented the views of over 40 distinct entities, including business, financial and legal associations, foreign companies, financial advisory and accounting firms, law firms, and one foreign government. While the commenters generally strongly supported the trading volume-based approach and other aspects of the reproposed rules, many offered suggestions designed primarily to fine-tune those rules.

20These comment letters, along with the letters received at the proposing stage, are available on the Commission's Internet Web site, located athttp://www.sec.gov/rules/proposed/s71205.shtml, and in the Commission's Public Reference Room in its Washington, DC headquarters.

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) facility21 during the preceding 12 months, regardless of whether the issuer met the trading volume benchmark at the time of termination;

21An ADR is a negotiable instrument that represents an ownership interest in a specified number of securities, which the securities holder has deposited with a designated bank depositary. Use of an ADR facility makes it easier for a U.S. resident to collect dividends in U.S. dollars. Moreover, because the clearance and settlement process for ADRs generally is the same for securities of domestic companies that are traded in U.S. markets, a U.S. holder of an ADR is able to hold securities of a foreign company that trades, clears and settles within automated U.S. systems and within U.S. time periods.

• 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-222 would constitute an Exchange Act annual report for the purpose of the reproposed prior reporting condition;

2217 CFR 240.15d-2.

• the appropriateness of the reproposed dormancy condition for equity securities registrants,23 including whether it would prohibit an issuer from conducting a registered offering in which an underwriter has agreed to a standby purchase commitment but only resells the purchased securities outside the United States;

23As reproposed, Rule 12h-6 would prohibit an equity securities registrant from selling its securities in the United States in a registered offering under the Securities Act, except for specified registered offerings, during the 12 months preceding the filing of its Form 15F.

• the appropriateness of the reproposed foreign listing condition for equity securities registrants,24 including whether it should apply to an issuer relying on the alternative 300 holder provision of Rule 12h-6, and to anissuer that delists from its non-U.S. exchange in connection with being acquired;

24As reproposed, Rule 12h-6 would require an equity securities issuer to have maintained a listing on an exchange in its primary trading market.

• 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),25 a successor issuer would have to file an Exchange Act annual report for the predecessor's most recently completed fiscal year before it could terminate its reporting obligations under Rule 12h-6;

2517 CFR 240.12g-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 15F26 solely to terminate its reporting obligations regarding debt securities must wait until the effectiveness of that termination before it can submit an application for the Rule 12g3-2(b) exemption regarding a class of equity securities.

26Like current Rules 12g-4 and 12h-3, which require the filing of Form 15, reproposed Rule 12h-6 would require the filing of a form—Form 15F—by which an issuer would certify that it meets the conditions for ceasing its Exchange Act reporting obligations.

C. Summary of the Adopted Rule Amendments

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,27 or terminated a sponsored ADR facility and, at the time of delisting or termination, the U.S. ADTV of the subject class of securities exceeded 5 percent of its worldwide ADTV for the preceding 12 months;

27Neither the OTC Bulletin Board operated by Nasdaq nor the market operated by the Pink Sheets LLC are deemed to be automated inter-dealer quotation systems. See Release 33-6862 (April 23, 1999), n.22.

• 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;28

28See Part II.D.1 of this release for clarification regarding the limited role of the predecessor in determining a successor issuer's eligibility to terminate its Exchange Act reporting obligations under Rule 12h-6.

• 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 byRule 12g3-2(b)29 on its Internet Web site or through an electronic information delivery system generally available to the public in its primary trading market, as reproposed;

29See Exchange Act Rule 12g3-2(b)(1)(iii) (17 CFR 240.12g3-2(b)(1)(iii)).

• 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 condition30 is intended to provide investors with at least one complete year's worth of Exchange Act reports, including an annual report, upon which they can base their investment decisions about a particular foreign registrant before that registrant exits the Exchange Act reporting system. The dormancy condition is designed to deter a foreign private issuer's promotion of U.S. investor interest through recent registered capital-raising shortly before exiting our reporting system. The one year reporting and dormancy conditions are consistent with the statutory requirements under section 15(d).

30See p. 12 and Part II.A.2 of this release.

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.

II. Discussion A. Conditions for Equity Securities Issuers 1. Quantitative Benchmarks a. Trading Volume Benchmark

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.31 This trading volume benchmark is substantially similar to the reproposed standard, except that the adopted benchmark requires an issuer to measure its U.S. ADTV as a percentage of its worldwide ADTV rather than the ADTV in its primary trading market.

31New Exchange Act Rule 12h-6(a)(4)(i) (17 CFR 240.12h-6(a)(4)(i)).

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.32 As commenters have noted, it is difficult for a reporting foreign private issuer to determine accurately the specific country of residence of its investors.33 Because a public float benchmark would require such a determination to varying degrees, most commenters agreed with our conclusion that the reproposed tradingvolume-based benchmark should result in reduced costs to issuers in determining whether they can terminate their Exchange Act reporting obligations.34

32See, for example, the letter, dated February 12, 2007, from Cleary Gottlieb, SteenHamilton LLP (Cleary Gottlieb).

33See the comment letters discussed in Part II.A.1.a of the Reproposing Release.

34See, for example, the letter, dated February 12, 2007, from the European Association for Listed Companies and other signatories (EALIC).

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.35 Some commenters expressed the view that basing the new exit rule on a trading volume measure would help ensure that an issuer's termination of Exchange Act registration and reporting would not have a significant impact on the primary price-setting determinants of an issuer's equity securities, which would allow for U.S. investors to trade in that issuer's securities following its U.S. deregistration.36

35See, for example, the letter, dated February 12, 2007, from Sullivan Cromwell LLP (Sullivan Cromwell) and the letter, dated January 2, 2007, from Galileo Global Advisors (Galileo).

36See, for example, the letter from Cleary Gottlieb.

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.37 Consequently, as one commenter indicated, by removing restrictions regarding the ability to exit U.S. securities markets, adoption of new Rule 12h-6 and the accompanying amendments will have a major impact on the perception that foreign companies have of those markets, making the U.S. capital markets “much more attractive and competitive on an international scale.”38

37See, for example, the letter, dated February 12, 2007, from the European Commission.

38See the letter from Cleary Gottlieb.

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.39 Although we originally proposed a set of quantitative benchmarks that depended primarily on whether an issuer was a WKSI, we are adopting the same trading volume standard for a smaller issuer as for a larger issuer in order to provide increased flexibility and simplification to the Exchange Act deregistration regime, and for the other reasons discussed in the Reproposing Release.40

39See, most recently, the letter, dated February 23, 2007, from the American Bar Association, Section of Business Law (ABA).

40For example, a trading volume standard that favored WKSIs could discourage smaller foreign companies from entering U.S. public capital markets, to the detriment of U.S. investors. Moreover, commenters at the proposing stage noted that the costs of continued Exchange Act reporting fall disproprotionately on smaller issuers. See Part II.A.1.a of the Reproposing Release.

i. Calculation of the U.S. Trading Volume Benchmark as a Percentage of Worldwide Trading Volume Instead of Primary Trading Market Trading Volume

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,41 as reproposed.42 The primary rationale for this request is that, with the increased globalization of securities markets, many issuers now trade on multiple non-U.S. markets. According to these commenters, since the goal of the reproposed trading volume benchmark is to determine the relative importance of the U.S. trading market for an issuer's securities, an issuer should be able to take into account all non-U.S. trading in its securities, and not just the trading that has occurred in the one or two jurisdictions comprising its primary trading market.43

41As discussed in Part II.A.4 of this release, we define primary trading market to mean that at least 55 percent of the trading in a foreign private issuer's subject class of securities 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. If an issuer aggregates the trading in two foreign jurisdictions, the trading market for the issuer's securities in at least one of the two foreign jurisdictions must be larger than the United States trading market for the same class of the issuer's securities. We proposed a substantially similar definition at the reproposing stage.

42See, for example, the letter, dated February 8, 2007, from BusinessEurope, the letters, dated February 12, 2007, from Davis Polk Wardwell (Davis Polk), Linklaters, and Makinson Cowell, and the letters from Cleary Gottlieb, EALIC, and the EU. In contrast, only one commenter opposed using worldwide trading volume. See the letter from Galileo.

43See the letters from Cleary Gottlieb and EALIC.

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.44 As discussed below, the purpose of the foreign listing condition is to help assure that there is a non-U.S. jurisdiction that principally regulates and oversees the issuance and trading of the issuer's securities and the issuer's disclosure obligations to investors.45 Limiting the definition of primary trading market in this context to no more than two jurisdictions helps to further the purpose of the foreign listing condition. In contrast, the purpose of the trading volume benchmark is to measure the relative U.S. market interest in a foreign private issuer's equity securities. Accounting for as much of the issuer's trading as is reasonably possible would further the purpose of this rule.

44See the letter from Linklaters.

45See Part II.A.4 of this release.

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.46

46Worldwide ADTV includes U.S. ADTV. Some commenters favored a trading measure based on the dollar value of shares traded rather than on the number of shares traded. See the letter, dated February 12, 2007, from Ziegler, Ziegler and Associates (Ziegler) and the letter from Galileo. We decline to adopt a trading value measure because we believe that it would add an unnecessary level of complexity and cost to the non-record holder determination.

ii. Inclusion of Off-Market Transactions in the Trading Volume Calculation

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.

Numerous commenters47 urged the Commission to permit an issuer to include “off-market” transactions when determining whether it meets the 5percent trading volume standard, rather than just transactions occurring on a stock exchange, as reproposed. These commenters maintained that it was inappropriate to require an issuer to include both on-exchange and off-exchange transactions when calculating its U.S. ADTV but not when calculating its worldwide trading volume. As noted by some of these commenters, members of Euronext markets are currently required to report off-market transactions.48 Moreover, some commenters noted that an EU Directive,49 scheduled for effectiveness in November 2007, will generally require the reporting of off-market transactions, which will make information regarding off-market transactions generally available in Europe the same way that such information is available through a transaction reporting plan in the United States.50

47See the letters from BusinessEurope, Cleary Gottlieb, Davis Polk, EALIC, the EU, Makinson Cowell, and Sullivan Cromwell, and the letters, dated February 12, 2007, from the International Bar Association and Skadden Arps Slate Meagher Flom (Skadden Arps).

48See, for example, the letter from Cleary Gottlieb.

49Directive 2004/39/EC, also known as the Market in Financial Instruments Directive (MiFID).

50See the letters from Cleary Gottlieb, the EU, and BusinessEurope.

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.51 According to these commenters, MiFID will encourage the development of such trading systems.52 These commenters stated that, as long as trading information is credible and the sources reliable, an issuer should be able to include information about securities transactions regardless of the platform on which they occur.53

51See the letters from the EU and Davis Polk.

52See, for example, the EU letter.

53See, for example, the letter from Davis Polk.

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.54 In contrast, one commenter, which favored a worldwide trading volume measure, expressly requested that the Commission prohibit the inclusion of off-market transactions for both the numerator and denominator because of the difficulty of obtaining over-the-counter trading information.55

54See the letters from BusinessEurope and the EU.

55See the letter from Skadden Arps.

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,56 pursuant to NASD rules,57 or reported by a national securities exchange otherwise than pursuant to an effective transaction reporting plan. In addition, an issuer may include in its calculation of worldwide ADTV off-market transactions, including transactions conducted through alternative trading systems, in addition to transactions occurring on an exchange, as long as an issuer has obtained the information concerning the off-market transactions from publicly available sources or third-party information service providers, upon which the issuer has reasonably relied in good faith, and as long as the off-market transaction information does not duplicate any other trading volume information obtained.

56Rule 601 of Regulation NMS (17 CFR 242.601) requires everynational securities exchange to file a transaction reporting plan regarding transactions in listed equity and Nasdaq securities.

57See, for example, NASD Manual Rule 6600et seq.for rules regarding recording and reporting transactions in OTC Equity Securities. A member broker-dealer must report information concerning OTC trades not involving a listed security, including a Nasdaq security, under the NASD rules rather than pursuant to a transaction reporting plan since the latter only covers unlisted transactions involving listed (and Nasdaq) securities.

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.58 The adopted rules do not specify any particular data sources that issuers must use to determine either its U.S. or worldwide trading volume. In this respect, when obtaining information concerning either on-exchange or off-exchange transactions, issuers will have the latitude to use market data vendors or other commercial service providers and publicly available sources of market information that they reasonably believe to be reliable and that do not duplicate trading volume information obtained from other sources, such as various exchanges or markets.59 Issuers will be required to disclose their trading volume data sources on Form 15F, which will inform investors of the data sources used.60

58See, for example, the letters from Cleary Gottlieb and EALIC.

59See Instruction 3.c to Item 4 of Form 15F.

60See Item 4.F of Form 15F.

iii. The 5 Percent Trading Volume Measure

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,61 many others supported the 5 percent threshold.62 Moreover, some of the commenters that requested an increase to 10 percent did so only if the Commission decided not to adopt a world-wide trading based benchmark.63

61See the letter, dated February 9, 2007, from SGL Carbon, the letter, dated February 12, 2007, from Fried Frank Harris Shriver Jacobson (Fried Frank), and the letter from Skadden Arps. Another commenter requested an increase to 15 percent. See the letter from i-CABLE Communications Ltd. (i-CABLE).

62See the letters from Cleary Gottlieb, EALIC, Galileo, Sullivan Cromwell, and the New York State Society of Certified Public Accountants (NYSSCPA).

63See the letters from the ABA, BusinessEurope, and Linklaters.

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.64 Moreover, by permitting an issuer to include both on-exchange and off-exchange transactions when calculating its worldwide ADTV, we have addressed the concerns of commenters who suggested the 5 percent threshold could be too low to achieve the rule's purpose of reducing the disincentive to U.S. registration that may be caused by the current exit regime.

iv. Definition of Equity Securities

64See Part III, n. 191 of this release.

We reproposed that, for purposes of new Rule 12h-6, an issuer would use the definition of equity security provided in Exchange Act Rule 3a11-1.65 That provision includes equity-linked securities, such as convertible debt securities and warrants, within the definition of equity security. Several commenters66 requested that the Commission exclude equity-linked securities from the definition of equitysecurity on the grounds that trading volume information for equity-linked securities is difficult to obtain. One commenter suggested using instead the definition of equity security provided in the Securities Act cross-border rules, which explicitly excludes convertible debt and other equity-linked securities.67

6517 CFR 240.3a11-1.

66See the letters from BusinessEurope, the EU, EALIC and Cleary Gottlieb.

67See the letter from Cleary Gottlieb, which cites Securities Act Rule 800(b) (17 CFR 230.800(b)).

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.68 Therefore, we are adopting a definition of equity security that is based on Rule 3a11-1, except that, for purposes of the trading volume and foreign listing provisions of Rule 12h-6, the definition explicitly excludes:

68See Part II.A.4 of this release.

• 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.69

69New Exchange Act Rule 12h-6(f)(3) (17 CFR 240.12h-6(f)(3)). These are the same categories of securities excluded from the definition of equity security under Securities Act Rule 800(b).

v. One Year Ineligibility Period After Delisting

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.70 Under this condition:

70

New Exchange Act Rule 12h-6(b)(1) (17 CFR 240.12h-6(b)(1)). We previously proposed to codify this delisting requirement, along with a similar requirement concerning termination of a sponsored ADR facility, as Notes to paragraph (a)(4) of reproposed Rule 12h-6. We have restructured final Rule 12h-6 to provide for these requirements in a separate paragraph and have changed the paragraph numbering of the adopted rule accordingly. As adopted, Rule 12h-6(b) does not apply to issuers terminating their reporting obligations under either Rule 12h-6(d) (the successor issuer provision) or Rule 12h-6(i) (the prior Form 15 filer provision).

• 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.71

71

For example, an issuer that failed to meet the trading volume standard at the date of delisting would have to meet the trading volume standard one year later when filing its Form 15F. If, notwithstanding its delisting, an active U.S. over-the-counter market in the company's securities continued, the company would not be eligible to use Rule 12h-6 and file a Form 15F in reliance on the trading volume benchmark.

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.72

72

See the letter, dated February 9, 2004, from Cleary Gottlieb.

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.73 We agree that companies should not be unnecessarily restricted in choosing the markets on which their securities are listed. Thus, we do not believe that delisting from a U.S. exchange should result in an automatic bar against a foreign private issuer from using the new exit rule. Nonetheless, we share the concern about possible negative impacts on U.S. investors stemming from a measure based solely on trading volume. Moreover, by requiring companies to remain registered and reporting under the Exchange Act for a period of time after delisting when, before delisting, the company had a relatively active U.S. market for its securities, U.S. investors will have access to information prepared in accordance with the Commission's financial reporting and disclosure requirements for a period of time during which, most likely, the U.S. market will be diminishing. Accordingly, we are adopting the delisting condition substantially as proposed.74

73

See the letters from Galileo, Makinson Cowell and SGL Carbon.

74

Some commenters requested that we exempt from the delisting condition an issuer that has been involuntarily delisted. See, for example, the letter, dated February 22, 2007, from Cravath, Swaine Moore (Cravath). We decline to do so since such an exemption could encourage an issuer not to comply with exchange standards in order to get delisted.
vi. One Year Ineligibility Period After Termination of Sponsored ADR Facility

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.75 In addition, the termination of ADR facilities will limit the ability of many U.S. investors to effect transactions inthe securities of the subject foreign company.

75

When an issuer terminates its ADR facility, the holders of ADRs generally have the option to make arrangements to hold the underlying securities directly. However, if holders are unable or unwilling to make these arrangements, or to pay the costs associated with these arrangements, the holders will have their investment cashed out, that is, the underlying securities will generally be sold into the home market and the net proceeds (after deducting fees and expenses of the selling broker and the depositary bank) remitted to the former ADR holders.

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.76 One commenter stated that adoption of the reproposed condition could dissuade issuers from sponsoring ADR programs, to the detriment of U.S. investors.77

76

See, for example, the letter, dated February 12, 2007, from the New York State Bar Association (N.Y. State Bar), and the letters from the ABA and Linklaters.

77

See the letter from the N.Y. State Bar.

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.78 We are also clarifying that, for purposes of Rule 12h-6's trading volume provision, an issuer must calculate the trading volume of its ADRs in terms of the number of securities represented by those ADRs.79

78

New Exchange Act Rule 12h-6(b)(2) (17 CFR 240.12h-6(b)(2)).