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The Securities and Exchange Commission ("Commission") recently published a concept release soliciting public comment on a new definition of foreign private issuer (FPI). The release reviews the background and regulatory purposes behind the existing framework that provides FPIs with less comprehensive regulation by the SEC than domestic issuers. The release explains that these regulatory accommodations were based on the Commission's understanding that FPIs were subject to "different circumstances than domestic issuers" that needed to be accounted for, such as requirements to comply with "laws and practices imposed by … home country jurisdictions." Such home country laws included regulations imposed by foreign securities exchanges where the FPI's securities are listed, and "meaningful disclosure and other regulatory requirements" existing in the FPI's home country jurisdiction. The FPI accommodations were intended to minimize the US regulatory burden of FPIs listing in multiple jurisdictions and therefore provide US investors greater access to FPI securities while still maintaining appropriate investor protections.
However, a recent Commission study compared recent characteristics of reporting FPIs with the characteristics of FPIs from 20 years earlier and that study undercuts the premises upon which the FPI accommodations were formulated. In this study the Commission found that a shift in the nature of the FPI population has occurred in recent decades. This shift includes a dramatic increase in the number of "China based issuers" that are almost always incorporated in lightly regulated tax havens (e.g., Cayman Islands, British Virgin Islands, Bermuda etc.) lacking comprehensive home-country disclosure laws and practices. In addition, the study showed that the equity securities of many FPIs are traded primarily, if not solely, in the United States, which is contrary to the Commission's expectations when the FPI rules were established.
Based on these and other trends, the Commission expressed concern that the current FPI definition may no longer be appropriately tailored to the purpose behind establishing an accommodating FPI framework and suggested potential amendments.
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