A Brave New World for FPIs: How the SEC’s new rules for share buyback disclosure could portend a new future for foreign private issuers

“This change fundamentally upends the Commission’s long-standing and bipartisan approach of largely deferring to the disclosures made by FPIs pursuant to their home country reporting requirements.” – Dissenting SEC Commissioner Mark Uyeda

Let’s start with some background.

The SEC has, for more than half a century, allowed foreign private issuers (FPIs) to be registered with the SEC with minimal additional reporting requirements above and beyond their home country rules. Namely, FPIs must (1) file an annual report on Form 20-F and (2) furnish a Form 6-K for any material information disclosed under its home country laws, reported pursuant to stock exchange requirements or provided to its shareholders. The US stock exchanges also exempt FPIs from many rules, deferring instead to the FPI’s home country requirements.

Starting in 2023, this changes.

First, there’s the new rules on clawback of executive incentive pay. Despite a number of market participants (including Freshfields) arguing that these rules should not apply to FPIs, the SEC nonetheless brought FPIs in scope, requiring FPIs to adopt clawback policies applicable to certain executives that will require the company to claw back their compensation in the event of certain financial restatements.

And now another shoe has dropped. 

Starting with Q2 2024, FPIs will be required to report on a quarterly basis their daily share buyback activity. For a more detailed discussion of the SEC’s final share buyback rules, in particular as they apply to U.S. domestic filers, see our blog post here. Below are the requirements for FPIs.

• New Form F-SR. FPIs must file a new Form F-SR on a quarterly basis. The form, which must be tagged using iXBRL, must report daily aggregated share repurchase data – regardless of whether the securities repurchased were ADRs on a US exchange or ordinary shares on the FPI’s home exchange. (It’s worth noting that FPIs are currently required to report monthly aggregated share repurchase data on an annual basis in their Form 20-F, and UK and EU issuers will be accustomed to reporting daily buyback data pursuant to their home country rules).
• Disclosure of director and senior management transactions. The new Form F-SR will include a checkbox that must be ticked if any director or member of senior management purchased or sold shares within 4 days before or after the announcement of any publicly announced buyback programme.
• Form 20-F disclosure requirements. An FPI’s annual report on Form 20-F will be required to include the following disclosures:
  • Objectives or rationales for each repurchase plan or programme and the process or criteria used to determine the amount of repurchases. The SEC is clear that boilerplate language will not suffice.
  • Any policies and procedures relating to purchases and sales of its securities by its officers and directors during a repurchase programme, including any restrictions on such transactions.
  • Certain information about publicly announced repurchase plans or programmes during the reporting year.
  • The number of shares or units purchased other than through a publicly announced plan or programme, and the nature of the transaction(s).

It’s worth noting why the SEC is implementing these rules.

The SEC has indicated its mistrust of share buyback programmes for quite some time – for example, questioning whether some buyback programmes are launched to achieve EPS targets, to increase the value of equity-linked executive compensation or to allow executives to benefit from trading in close proximity to buyback announcements. The SEC believes that these rules will, at least partially, address these concerns.

Fine. But there are any number of US rules applicable to domestic issuers that could confer benefits to investors in FPIs but where the SEC has, historically, deferred to an FPI’s home country rules. So this begs the question of why the SEC thinks this new rule, the new clawback rules and some other proposed rules on the horizon (such as recently proposed climate-related and cybersecurity disclosure rules) in particular require FPI compliance. 

One can only assume that these developments portend a new era in which the SEC brings FPI compliance closer in line with domestic issuers. The challenge for FPIs will be compliance with several sets of requirements, which may not always be well harmonised.

So watch this space, and let’s see what’s next for FPIs as they find ways to manage compliance with a new set of SEC regulations.