Today we put out questions to industry participants around our framework for allowing foreign private issuers access to our markets.[1] It has been nearly two decades since we last visited this topic, and I agree that it is time for us to reconsider those rules. The framework that we have in place is premised on the expectation that foreign issuers seeking access to our markets will be subject to meaningful disclosure and oversight in their home jurisdictions. But the data posited by staff calls those assumptions into question. The markets have changed and we must too.
So, I’m happy to see us putting out this release. I approach this issue with certain principal questions in mind.
- Does our framework for allowing foreign private issuers access to our capital markets provide adequate disclosure to, and protection for, American investors?
- Are we providing advantages to foreign issuers by giving them access to our markets at a proverbial “discount,” thereby disadvantaging domestic issuers (particularly smaller U.S. companies) who abide by the full complement of our rules?
- And, as a corollary - what are the costs to U.S. companies and U.S. investors as a result of these policy choices?
At bottom, I think we need to have a robust, but level playing field. Unfortunately, as the release sets out, there are some potentially troubling data on the landscape as it exists today.
- First, among the set of reporting foreign private issuers, the data show that their home country jurisdictions are very different than they were 20 years ago. According to the staff’s data, as of 2023, the largest jurisdiction measured by “issuer incorporation” is the Cayman Islands (33.3%) and the largest jurisdiction by “issuer headquarters” is China (22.6%).[2] In 2003, Canada (which we have recognized as having a robust regulatory regime)[3] was the most prominent jurisdiction for foreign private issuers, both in terms of incorporation and headquarters.[4] Prior to the 2003 amendments, the overwhelming majority of foreign private issuers were European in origin and subject to oversight by their domestic regulator.[5]
- Second, we’re seeing more issuers that have headquarters in one place (again, most prominently China) and then incorporate in another place (most prominently the Cayman Islands).[6]
- And third, over half of the 20-F filers trade exclusively on U.S. markets, and not in their home country or other markets.[7] Where companies are not trading in their home markets, they may not be subject to the rigorous disclosure or regulatory regimes that the Commission had in mind when it erected this framework.[8]
The data appear to paint a picture of regulatory forum shopping. Companies seem to be setting up headquarters in one country (perhaps based on the location of the founders, cheap labor, resources, extradition laws or other reasons); then seeking incorporation in a separate country, which may provide diminished oversight, disclosure or reporting requirements; and then, finally, coming to the U.S. to satiate their capital needs. We allow these companies – in large part Chinese companies incorporated in the Caymans – the benefit of our markets regardless of whether their home rules provide the meaningful transparency and accountability that had been historically envisioned in connection with our foreign issuer framework.
We should not unwittingly allow our markets to be part of an international regulatory loophole, at the expense of U.S. investors and U.S. businesses.
To that end, I’m pleased that the staff has put together this concept release that asks important questions about whether our current definition of “foreign private issuer” is sufficiently robust to provide necessary disclosures, protect investors, and preserve market integrity in light of this current landscape.[9] We’re asking a lot of the right questions and I hope that market participants of all stripes will carry the mantle in response.
But I also wonder if we should look beyond just the definition of “foreign private issuer” itself and revisit whether the actual securities law exemptions offered to foreign issuers are fit for purpose today. The release lists over 20 exemptions or accommodations offered to foreign private issuers.[10] Among them:
- Reporting foreign private issuers are not required to file quarterly reports, whereas domestic issuers file reports quarterly on Form 10-Q;
- They are subject to potentially more lenient current reporting requirements than those required from domestic issuers on Form 8-K;
- They are exempt from Regulation Blackout Trading Restrictions;
- And, they are exempt from obligations under Section 16.
The list goes on.
But isn’t it worth revisiting this list? Has the scale tipped too far in terms of relieving foreign private issuers of important reporting and integrity obligations? Take the Section 16 exemption. While corporate insiders of U.S. public issuers are required to publicly disclose their trades electronically within two days on Form 4, insiders of foreign private issuers do not have the same reporting obligations. Recent bi-partisan legislation[11] and studies[12] have put on display the inequities around trading among insiders at foreign private issuers, which show opportunistic trading resulting in significant loss avoidance by foreign insiders. This appears to be the case especially in connection with foreign insiders in certain non-extradition countries such as China and Russia.[13] Why are U.S. insiders held to account for insider trading, when (it appears) foreign insiders may do so with impunity? This does not to me seem the correct policy result.
One way to make sure that we are preserving market integrity and providing U.S. investors with material information about their investments is to – ourselves – ensure through our rules that all who seek to benefit from our markets do so under equal obligations and with equal accountability. That is our responsibility and obligation. It is worth revisiting not only the definition of foreign private issuer, but also the long list of carveouts bestowed upon foreign companies seeking to access our markets.
Thank you to the staff in the Division of Corporation Finance, the Division of Economic and Risk Analysis, the Office of International Affairs, the Office of Chief Accountant, the Office of the General Counsel, the offices of the Chairman and my fellow Commissioners, and all who contributed to this release. Thank you also to the IT team and all who assisted in the operations behind today’s open meeting. I look forward to hearing the feedback of all industry participants.
[1] U.S. Securities & Exchange Commission, Concept Release on Foreign Private Issuer Eligibility, RIN 3235-AN35, Rel. Nos. 33-11376; 34-10317 (the “Release”).
[2] Release at 20-24.
[3] In 1991, when the U.S. entered into the multijurisdictional disclosure system with Canada, then-Chairman Richard Breeden noted that “The MJDS system was developed initially with Canada due to its developed capital markets and strong regulatory tradition. While specific disclosure requirements of the United States and Canada differ in detail, the regulatory systems share the common purpose of ensuring that investors are given information adequate to make an informed investment decision.” He also noted that Canada had “highly developed accounting and auditing standards,” which was “vital in insuring that use of Canadian financial statements in the U.S. will not prejudice U.S. investors through inadequate or misleading information.” Chairman Richard C. Breeden, Opening Statement on Adoption of Rules, Forms and Schedules for Multijurisdictional Disclosure with Canada, (May 30, 1991).
[4] Release at 23.
[5] Steven Davidoff, Rhetoric and Reality: A Historical Perspective on the Regulation of Foreign Private Issuers, Univ. of Cincinnati L. Rev. Vol. 79, Issue 2 at 625 (Oct. 2011).
[6] Release at 24-26. For example, staff research shows that nearly all China-based issuers were incorporated in the Cayman Islands or the British Virgin Islands. Release at 25.
[7] Release at 17 and n.66; id. at Section III.B. Here too, these companies that trade exclusively in the U.S. are predominantly incorporated in the Caymen Islands and headquartered in China. Id. at 33.
[8] Indeed, we know that certain jurisdictions exempt issuers from their securities laws if they qualify as foreign private issuers in the U.S. Release at 39 and n.98.
[9] Today’s release targets the definition of who can qualify as a “foreign private issuer.” The current test for determining what entities may qualify under that definition and gain meaningful access to our markets, centers around where a company’s shareholders and business contacts reside. 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.
[10] Release at 10-16.
[11] Senators John Kennedy and Chris Van Hollen, Holding Foreign Insiders Accountable Act, S.1089 (Mar. 24, 2025); see also Senators Kennedy and Van Hollen, Foreign Companies Should Have to Play By the Same Rules, WSJ (Apr. 16, 2023).
[12] See Daniel J. Taylor, Bradford Lynch-Levy, and Robert J. Jackson, Jr., Holding Foreign Insiders Accountable, NYU Law and Economics Research Paper No. 22-16 (April 1, 2022).
[13] Id.; see also Jesse Fried and Ehud Kamar, China and the Rise of Law-Proof Insiders, European Corporate Governance Institute, Law Working Paper 557/2020 (Dec. 10, 2020).
