On March 5, the U.S. Securities and Exchange Commission used its exemptive authority under the Holding Foreign Insiders Accountable Act (the “HFIAA’) to issue an exemption for certain officers and directors of Foreign Private Issuers (“FPIs”) who would otherwise be subject starting March 18 to the beneficial ownership reporting requirements of Exchange Act Section 16(a) (which we have previously blogged about). This follows a week after the Commission voted on final rules implementing the HFIAA (which rules largely track the language of the statute).
Under the March 5 exemption, officers and directors of FPIs that (a) are organized under the laws of one of six enumerated jurisdictions, and (b) are subject to certain enumerated “qualifying regulations” in one of those six jurisdictions, are exempt from the beneficial ownership reporting requirements of Exchange Act Section 16(a). The six jurisdictions subject to the exemption are:
- Canada;
- Chile;
- The European Economic Area (which includes the member states of the European Union (“EU”) in addition to Iceland, Liechtenstein, and Norway);
- The Republic of Korea;
- Switzerland; and
- The United Kingdom.
The qualifying regulations include Article 19 of the EU Market Abuse Regulation (for the European Economic Area) and Article 19 of the UK Market Abuse Regulation.
There are two conditions to the exemption:
- Any director or officer seeking to rely on this exemption is required to report their transactions in the issuer’s securities as set forth under the qualifying regulation to which they are subject; and
- An English translation of the relevant report must be made publicly available within two business days of filing.
We note a few important nuances to this exemption:
- FPIs must be organized under the laws of one of the six jurisdictions. FPIs not organized under the laws of one of the six jurisdictions but nonetheless subject to that jurisdiction’s qualifying regulations for other reasons (for example, because of cross border listings) do not qualify for the exemption.
- FPIs organized under the laws of one of the six jurisdictions but subject to the qualifying regulations of another one of the six do qualify.
- Officers or directors who are not subject to reporting under a qualifying regulation but who are nonetheless subject to Section 16 (which might occur for Chief Accounting Officers who do not hold a management function) do not qualify for the exemption.
- Regarding the requirement that an English transaction of the report must be made publicly available, the SEC order states that “if an English version of the report cannot be filed through an appropriate regulator’s (or listing venue’s) online database then the report could be made publicly available on the company website.”
Other jurisdictions are absent from the exemptive order, including Israel and jurisdictions in Latin America (other than Chile), Asia, Oceania and Africa. While the SEC continues to have authority under the HFIAA to exempt FPIs in other jurisdictions, the imminent effectiveness of the new Section 16(a) reporting obligations means officers and directors not subject to the exemption should prepare to comply. The exemptive order did not state reasons other jurisdictions and regulations were not included.
Freshfields US LLP has engaged with the SEC staff on exemptive authority and will continue to track the application of the HFIAA and the SEC’s concept release / rulemaking initiative on FPIs and enforcement stance more generally (which has been the subject of previous Freshfields blogs).
We note that the HFIAA does not impose Section 16(b) liability on officers and directors of FPIs (or shareholders). Were that to apply in the future, it would be a major win for plaintiffs lawyers and a significant drawback for FPIs considering accessing U.S. capital markets.
For questions about the application of this exemptive order or the Section 16(a) reporting to foreign private issuers, please consult with the authors or your Freshfields capital markets contact including Michael Levitt, Pamela Marcogliese, Jacqueline Marino, Sarah Solum, Jeremy Barr, and Tracy Zhang in the United States, Doug Smith and Ethan Magid in London, and Arun Balasubramanian in Asia.
