Transcript How Foreign Banks Can Finance in the United States

January 10, 2013
NY2 713434
© 2012 Morrison & Foerster LLP All Rights Reserved | mofo.com
How Foreign Banks Can Finance
in the United States
Topics for Presentation
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Rule 144A offerings
Section 3(a)(2) offerings
Covered bond offerings
Registration process for registered offerings
• Confidential submissions and the registration process (including Industry Guide 3
disclosures in registration statements)
• Benefits available to foreign private issuers (“FPIs”)
• Accounting considerations
• Corporate governance considerations
• Ongoing reporting obligations
• Specialized disclosure requirements
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Foreign Bank Debt Financing Activities
• Types of bank debt issuances
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Senior unsecured debt
Senior secured debt (including covered bonds)
Subordinated debt
Structured debt (e.g., equity-linked and commodity-linked notes)
Hybrid debt / preferred stock
Contingent capital (“coco”) debt
Deposit liabilities
• Issuing entities
• Home offices
• US branches
• Other affiliated entities (e.g., financing SPVs)
• Issuance formats
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Private placements (pursuant to Section 4(a)(2) of the Securities Act).
Rule 144A offerings
Section 3(a)(2) offerings
SEC-registered offerings
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Rule 144A Offerings
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Why Are Rule 144A Offerings Attractive to NonU.S. Banks?
• Rule 144A provides a clear safe harbor for offerings to institutional
investors.
• Does not require extensive ongoing registration or disclosure
requirements.
• Index eligible issuances have good liquidity in the Rule 144A
market.
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Rule 144A – Overview
• Rule 144A provides a non-exclusive safe harbor from the registration
requirements of Section 5 of the Securities Act for resales of
restricted securities to “qualified institutional buyers” (QIBs).
• The rule recognizes that not all investors are in need of the
protections of the prospectus requirements of the Securities Act.
• The rule applies to offers made by persons other than the issuer of
the securities. (i.e., “resales”).
• The rule applies to securities that are not listed on a U.S. securities
exchange or quoted on an automated inter-dealer quotation system.
• A reseller may rely on any applicable exemption from the registration
requirements of the Securities Act in connection with the resale of
restricted securities (such as Regulation S or Rule 144).
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Types of Rule 144A Offerings
• Rule 144A offering for an issuer that is not registered in the U.S. –
usually a standalone
• Rule 144A continuous offering program
• Used for repeat offerings, often by financial institution and insurance company
issuers, to institutional investors.
• Often used for structured products and for covered bonds sold to QIBs.
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How Are Rule 144A Offerings Structured?
• The issuer initially sells restricted securities to investment bank(s)
as “initial purchasers” in a Section 4(a)(2) or Regulation D private
placement.
• The investment bank reoffers and immediately resells the
securities to QIBs under Rule 144A.
• Often combined with a Regulation S offering.
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Rule 144A Offering Memorandum
• May contain similar information to a full “S-1/F-1” prospectus, or may be
much shorter.
• If the issuer is a public company, it may incorporate by reference the
issuer’s filings from its home country.
• Scope of disclosure (whether included or incorporated by reference) may be
comparable to a public offering, as the initial purchasers/underwriters expect
“10b-5” representations from the issuer, and legal opinions from counsel.
• Due diligence by counsel will often be similar to that performed in a public
offering.
• For a non-U.S. offering, with a Rule 144A “tranche,” there may be a U.S.
“Rule 144A wrapper” attached to the non-U.S. offering document.
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Additional Documentation for a Rule 144A
Offering
• A purchase agreement between the issuer and the initial
purchasers/underwriter(s)
• Similar to an underwriting agreement in terms of representations, covenants,
closing conditions and indemnities.
• Legal opinions
• 10b-5 negative assurance letters
• Comfort letters
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How Are Rule 144A Offerings Conducted?
• Often similar to a registered offering.
• “Road show” with a preliminary offering memorandum.
• Confirmation of orders with the final offering memorandum.
• The offering memorandum may be delivered electronically.
• The purchase agreement is executed at pricing, together with the
delivery of a comfort letter.
• Closing on a “T+3” basis, or as otherwise agreed with the investors.
• Publicity: generally limited to a Rule 135c compliant press release –
limited information about the offering.
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The JOBS Act and Marketing Rule 144A
Offerings
• The JOBS Act requires the SEC to adopt rules to permit general
solicitations in connection with Rule 144A offerings, provided that
sales are made solely to QIBs.
• The SEC issued proposed rules on August 29, 2012 and the
comment period ended on October 5, 2012. The SEC has not
issued final rules at this time.
• Potential impact:
• Use of additional offering modalities to market transactions and disseminate
information.
• For example, public websites that describe the offering and press releases.
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Conditions for Rule 144A Offering
• Reoffers or resales only to a QIB, or to an offeree or purchaser that
the reseller reasonably believes is a QIB.
• Reseller must take steps to ensure that the buyer is aware that the
reseller may rely on Rule 144A in connection with such resale.
• The securities reoffered or resold (a) when issued were not of the
same class as securities listed on a U.S. national securities
exchange or quoted on a U.S. automated inter-dealer quotation
system and (b) are not securities of an open-end investment
company, UIT, etc.
• For an issuer that is not an Exchange Act reporting company or
exempt from reporting pursuant to Rule 12g3-2(b) under the
Exchange Act, the holder and a prospective buyer designated by the
holder must have the right to obtain from the issuer, upon the
holder’s request, certain reasonably current information.
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Rule 159: “Time of Sale Information”
• Although Rule 159 under the Securities Act is not expressly
applicable to Rule 144A offerings, many investment banks apply
the same treatment, in order to help reduce the risk of liability.
• Use of term sheets and offering memoranda supplements, to
ensure that all material information is conveyed to investors at the
time of pricing.
• Counsel is typically expected to opine as to the “disclosure
package,” as in the case of a public offering.
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Section 3(a)(2) Offerings
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Section 3(a)(2) and Offerings by Banks
• Section 3(a)(2) of the Securities Act exempts from registration under
the Securities Act any security issued or guaranteed by a bank.
• Basis: banks are highly regulated, and provide adequate disclosure
to investors about their finances in the absence of federal securities
registration requirements. Banks are also subject to various capital
requirements that may increase the likelihood that holders of their
debt securities will receive timely payments of principal and interest.
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What Is a “Bank”?
• Under Section 3(a)(2), the institution must meet both of the following
requirements:
• it must be a national bank or any institution supervised by a state banking
commission or similar authority; and
• its business must be substantially confined to banking.
• Examples of entities that do not qualify:
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Bank holding companies
Finance companies
Investment banks
Foreign banks
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Guarantees
• Another basis for qualification as a bank: securities guaranteed by a
bank.
• Not limited to a guaranty in a legal sense, but also includes arrangements in
which the bank agrees to ensure the payment of a security.
• The guaranty or assurance of payment, however has to cover the entire
obligation; it cannot be a partial guarantee or promise of payment.
• Again, guarantees by foreign banks (other than those of an eligible U.S. branch or
agency) would not qualify for this exception.
• The guarantee is a legal requirement to qualify for the exemption; investors will
not be looking to the US branch for payment/credit. Investors will look to the
home office.
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Non-U.S. Banks/U.S. Offices
• U.S. branches/agencies of foreign banks are conditionally entitled to
rely on the Section 3(a)(2) exemption.
• 1986: the SEC takes the position that a foreign branch/agency will
be deemed to be a “national bank” or a “banking institution
organized under the laws of any state” if “the nature and extent of
federal and/or state regulation and supervision of that particular
branch or agency is substantially equivalent to that applicable to
federal or state chartered domestic banks doing business in the
same jurisdiction.”
• As a result, U.S. branches/agencies of foreign banks are frequent
issuers or guarantors of debt securities in the U.S. Most issuances
or guarantees occur through the NY branches of these banks.
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FINRA Requirements
• Even though securities offerings under Section 3(a)(2) are exempt
from registration under the Securities Act, public securities offerings
conducted by banks must be filed with the Financial Industry
Regulatory Authority (“FINRA”) for review under Rule 5110(b)(9),
unless an exemption is available.
• Transactions under Section 3(a)(2) must also be reported through
FINRA’s Trade Reporting and Compliance Engine (“TRACE”).
TRACE eligibility provides greater transparency for investors.
Currently, Rule 144A securities are not TRACE reported.
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OCC Registration/Disclosure
• National banks or federally licensed U.S. branches/agencies of foreign
banks regulated by the Office of the Comptroller of the Currency (the
“OCC”) are subject to OCC securities offering (Part 16) regulations.
• Part 16 of OCC regulations provides that these banks or banking offices
may not offer and sell their securities until a registration statement has been
filed and declared effective with the OCC, unless an exemption applies.
• An OCC registration statement is generally comparable in scope and detail
to an SEC registration statement; as a result, most bank issuers prefer to
rely upon an exemption from the OCC’s registration requirements. Section
16.5 provides a list of exemptions, which includes:
• Regulation D offerings
• Rule 144A offerings
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Part 16.6 of the OCC Regulations
• 12 CFR 16.6 provides a separate partial exemption for offerings of
“non-convertible debt” to accredited investors in denominations of
$250,000 or more.
• National banks with foreign parents that have shares traded in the
US may be able to rely upon this exemption by furnishing the foreign
private issuer reports (Forms 20-F, 6-K) filed by foreign issuers.
• Alternatively, Federal branches/agencies may rely on this exemption
by furnishing to the OCC parent bank information which is required
under Exchange Act Rule 12g3-2(b), and to purchasers the
information required under Securities Act Rule 144A(d)(4)(i).
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Denominations
• The 3(a)(2) exemption does not require specific minimum
denominations in order to obtain the exemption.
• However, for a variety of reasons, denominations may at times be
significantly higher than in retail transactions:
• Offerings targeted to institutional investors.
• Complex securities.
• Relationship to 16.6’s requirement of $250,000 minimum denominations.
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Deposits Versus Other Liabilities
• Foreign banks may elect to issue debt instruments in the form of
deposit liabilities as opposed to “pure” debt:
• Yankee CDs (US$-denominated deposit liabilities of a foreign bank or its US
branch).
• Other types of deposits (e.g., structured deposits).
• What are the legal differences between deposit liabilities and other
debt issuances?
• In the case of foreign banks, less than meets the eye.
• Foreign banking organization (“FBO”) deposit liabilities are not insured and
generally are issued in large denominations (minimum $100,000 and usually
higher).
• For capital equivalency/asset segregation purposes, deposits and non-deposit
liabilities generally are treated in the same manner.
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Blue Sky Regulation
• Securities issued under Section 3(a)(2) are considered “covered
securities” under Section 18 of the Securities Act.
• As a result, blue sky filings are not needed in any state in which the
securities are offered.
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Exchange Act Reporting
• Section 12(i) of the Exchange Act provides that the administration
and enforcement of Exchange Act Sections 12, 13, 14(a), 14(c),
14(d), 14(f), and 16 is vested in the OCC with respect to national
banks, the Federal Reserve Board as to member banks of the
Federal Reserve System, the FDIC as to all other insured banks,
and the OTS as to savings associations.
• As a result, a bank that otherwise would be subject to Exchange Act periodic
reporting requirements would submit its reports to the appropriate banking agency,
and not to the SEC.
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Exchange Act Reporting (cont’d)
• Foreign banks are not Section 3(a)(2) “banks” and therefore are not
subject to Exchange Act Section 12(i), but to the extent they
otherwise are required to register under the Exchange Act as issuers,
or submit reports as foreign private issuers, they would register and
file their reports with the SEC.
• U.S. branches/agencies of foreign banks would not be subject to
Exchange Act Section 12(i) requirements solely by virtue of their
issuance of debt securities.
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Securities Liability
• Securities offerings of, or guaranteed by, a bank under Section
3(a)(2) are not subject to the civil liability provisions under Section
11 and Section 12(a)(2) of the Securities Act.
• However, the anti-fraud provisions of Section 17 of the Securities
Act are applicable to offerings under Section 3(a)(2).
• Additionally, offerings under Section 3(a)(2) are also subject to
Section 10(b) of the Exchange Act and the anti-fraud provisions of
Rule 10b-5 of the Exchange Act.
• Impact on offering documents, and use of offering circulars to
convey material information and risk factors.
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Section 3(a)(2) Offering Documentation
• The offering documentation for bank notes is similar to that of a
registered offering.
• Base offering document, which may be an “offering memorandum”
or an “offering circular” (instead of a “prospectus”).
• The base document is supplemented for a particular offering by one
or more “pricing supplements” and/or “product supplements.”
• These offering documents may be supplemented by additional
offering materials, including term sheets and brochures.
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Comparison of Section 3(a)(2) to Rule 144A
Section 3(a)(2)
Rule 144A
Required issuer:
Need a US state or federal licensed bank as issuer or as
guarantor
No specific issuer or guarantor is required
Exemption from the
Securities Act:
Section 3(a)(2)
Section 4(a)(2) / Rule 144A
FINRA Filing
Requirement:
Subject to filing requirement and payment of filing fee
Not subject to FINRA filing
Blue Sky:
Generally exempt from blue sky regulation
Generally exempt from blue sky regulation
Listing on an
exchange:
May be listed if issued in compliance with Part 16.6
No
“Restricted”
No; considered “public” and therefore eligible for bond
indices, TRACE reporting
Yes
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Comparison of Section 3(a)(2) to Rule 144A
(cont’d)
Section 3(a)(2)
Rule 144A
Required
governmental
approvals:
Banks licensed by the OCC are subject to the Part
16.6 limitations, unless an exemption is available.
Generally none.
Permitted Offerees:
All investors, which means that there is a broader
market. However, banks licensed by the OCC are
subject to the Part 16.6 limitations, unless an
exemption is available. Generally, sales to “accredited
investors.”
Only to QIBs. No retail.
Minimum
denominations:
All denominations. However, banks licensed by the
OCC are subject to minimum denomination
requirement.
No minimum denominations requirement.
Role of
Manager/Underwriter:
Either agented or principal basis.
Must purchase as principal.
40 Act:
“Banks” not considered investment companies.
Foreign banks will want to review 40 Act guidance.
Non-bank issuer should consider whether there is a 40
Act issue.
Settlement:
Through DTC, Euroclear/Clearstream.
Through DTC, Euroclear/Clearstream
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3(a)(2) Issuances (2011- 2013)
Pricing Date
1/7/2013
1/7/2013
11/8/2012
11/8/2012
11/2/2012
11/2/2012
10/17/2012
9/4/2012
8/10/2012
8/8/2012
7/26/2012
7/26/2012
7/10/2012
7/10/2012
7/10/2012
6/6/2012
3/28/2012
3/16/2012
3/5/2012
3/1/2012
3/1/2012
2/1/2012
1/17/2012
1/11/2012
7/20/2011
7/5/2011
5/24/2011
4/20/211
4/14/2011
4/6/2011
3/22/2011
2/17/2011
1/25/2011
1/25/2011
1/12/2011
1/4/2011
1/4/2011
Issuer
Intesa SanPaolo Spa (New York)
Intesa SanPaolo Spa (New York)
American Express Centurion Bank
American Express Centurion Bank
Rabobank Nederland
National Bank of Canada
PNC Bank NA
Australia & New Zealand Banking Group (New York)
UBS AG (Stamford)
National Australia Bank Ltd
National Australia Bank (New York)
National Australia Bank (New York)
Sumitomo Mitsui Banking Corp
Sumitomo Mitsui Banking Corp
Sumitomo Mitsui Banking Corp
TCF National Bank
Svenska Handelsbanken AB
National Australia Bank Ltd
Commonwealth Bank of Australia (New York)
National Australia Bank (New York)
National Australia Bank (New York)
Rabobank Nederland
First Republic Bank
Rabobank Nederland
Rabobank Nederland
Svenska Handelsbanken AB
BNP Paribas SA
BNP Paribas SA
Rabobank Nederland
BNP Paribas (New York)
UBS AG (Stamford)
BNP Paribas SA
UBS AG (Stamford)
UBS AG (Stamford)
BNP Paribas (New York)
Rabobank Nederland
Rabobank Nederland
Ratings (M/S)
Baa2/BBB+
Baa2/BBB+
A2/AA2/AAa2/AAAa2/A
A3/AAa2/AA-/BBBAa2/AAAa2/AAAa2/AAAa3/A+
Aa3/A+
Aa3/A+
Baa1/BBBAa3/AAAa2/AAAa2/AAAa2/AAAa2/AAAa2/AABaa3/BBB
Aa2/AAAa2/AAAa3/AAA2/A+
A2/A+
Aa2/AAA2/A+
A2/A
A2/A+
A2/A
A2/A
A2/A+
Aa2/AAAa2/AA-
Coupon (%)
3.125
3.875
0.875
3mL+45bp
3.950
1.450
2.700
1.875
7.625
2.000
3mL+113bp
1.600
1.350
1.800
3.200
6.250
2.875
3mL+1bp
1.950
2.000
2.750
3.875
6.700
3.375
3mL+20bp
3.125
3.250
3.250
3mL+35bp
5.000
3mL+40bp
3.250
2.250
3mL+100bp
5.000
1.850
4.500
Tranche Value (US$mm)
2,000
1,500
750
550
1,500
750
1,000
750
2,000
13
500
1,250
1,000
1,250
750
110
1,250
175
2,000
1,500
1,000
3,000
200
2,500
360
1,250
100
150
350
1,000
300
100
1,000
750
2,000
1,250
1,500
Structure
3YR FXD
5YR FXD
3YR FXD
3YR FRN
10YR FXD
5YR FXD
10YR FXD
5YR FXD
10YR FXD
5YR FXD
3YR FRN
3YR FXD
3YR FXD
5YR FXD
10YR FXD
10YR FXD
5YR FXD
3YR FRN
3YR FXD
3YR FXD
5YR FXD
10YR FXD
Perpetual
5YR FXD
2YR FRN
5YR FXD
4YR FXD
4YR FXD
3YR FRN
10YR FXD
2YR FRN
4YR FXD
3YR FXD
3YR FRN
10YR FXD
3YR FXD
10YR FXD
Maturity Date
1/15/2016
1/16/2018
11/13/2015
11/13/2015
11/9/2022
11/7/2017
11/1/2022
10/6/2017
8/17/20222
8/10/2017
8/7/2015
8/7/2015
7/18/2015
7/18/2017
7/18/2022
6/8/2022
4/4/2017
3/20/2015
3/16/2015
3/9/2015
3/9/2017
2/8/2022
Perpetual
1/19/2017
7/25/2013
7/12/2016
3/11/2015
3/11/2015
4/14/2014
1/15/2021
9/25/2012
3/11/2015
1/28/2014
1/28/2014
1/15/2021
1/10/2014
1/11/2021
Deal Nationality
Italy
Italy
US
US
Netherlands
Canada
US
Australia
Switzerland
Australia
Australia
Australia
Japan
Japan
Japan
US
Sweden
Australia
Australia
Australia
Australia
Netherlands
US
Netherlands
Netherlands
Sweden
France
France
Netherlands
France
Switzerland
France
Switzerland
Switzerland
France
Netherlands
Netherlands
Note: Shading denotes Yankee issuance; list is comprehensive but may not capture every 3(a)(2) issuance in 2011-13; 3(a)(2) issuances are
unsecured
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Covered Bond Offerings
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What Are Covered Bonds?
• Senior debt of a regulated financial entity
• Secured by a pool of financial assets
• Mortgage loans – residential and commercial
• Public sector obligations
• Ship loans
• Protected from acceleration in the event of issuer insolvency
• By statute or legal structure
• Collateral is isolated from insolvency estate of the issuer
• Collateral pays bonds as scheduled through maturity
•
•
•
•
•
A dynamic collateral pool – refreshed every month
Typically bullet maturity, fixed rate bonds
Repayment liabilities remain on the balance sheet of the originator
Most countries have statutes enabling covered bond.
Very strong implicit government support in many jurisdictions
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Benefits to Issuing Banks
• Lower funding cost than senior bank debt
• Extension of WAM for bank funding
• Typical maturities for covered bonds of seven years or more.
• Diversification of funding base
• Investors typically do not buy RMBS or senior bank debt.
• Mortgage modifications to accommodate borrower is easy (no
competing interests)
• Brings mortgage finance out of the “shadow banking” world
• Levels the playing field
• Foreign banks currently have access to this investor base, including in the U.S.,
while U.S. banks do not.
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Covered Bond Investors
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•
•
•
•
•
•
•
Covered bond investors buy sovereign and agency debt
Some of these same investors buy FNMA, FHLMC, GNMA debt
Typically they will not buy senior bank debt
They do not buy CMBS or ABS or RMBS
To attract these investors you need statutory covered bonds
Predominantly banks, central banks, funds and insurance companies
A €3 trillion market in Europe
The U.S. investor base is opening up (foreign banks issued
approximately $50 billion in covered bonds in the U.S. in 2012)
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Benefits to Investors
•
•
•
•
•
•
•
•
•
•
•
High credit quality – most bonds are triple-A rated
In Europe, favorable capital treatment for bank investors
Higher yield than sovereign debt
Diversification – sovereign or agency debt is viewed as similar risk
Good liquidity
Issuance regulated by statute in many European jurisdictions
More investor friendly than RMBS or CMBS
Not an ‘originate-to-sell’ model
No complex tranching – good transparency
No negative convexity (prepayment) risk
100% ‘skin in the game’
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Foreign Bank Issuances
• Foreign banks issuing into the U.S. market have been relying on their
domestic covered bond framework and have been using cover pool
assets that are foreign (not in the U.S.).
• Issuances into the U.S. have been structured as program issuances
(or syndicated takedowns) conducted on an exempt basis, that
means that the foreign issuer is relying on exemptions from the U.S.
securities laws requiring registration of public offerings of securities.
• To date, only one issuer (RBC) has registered a covered bond with
the SEC. It is expected that other foreign issuers will follow suit.
• As a result, offerings have been targeted at U.S. institutional
investors and generally conducted in reliance on Rule 144A.
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Registration Process for Registered
Offerings
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What Securities to Register?
 A foreign private issuer (“FPI”) may offer any type of security that a
U.S. domestic issuer is permitted to offer.
 In addition, an FPI may offer its securities using American Depositary
Receipts (“ADRs”).
 An FPI registering securities for the first time, will register ordinary
shares or ADRs.
 Once an FPI has ordinary shares or ADRs listed in the U.S., it may
register debt securities under another registration statement.
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Which Registration Form Should be Used?
 Typically, an FPI will register ordinary shares on Form F-1.
 A registration statement on Form F-1 is similar to a Form S-1 filed by U.S.
domestic issuers and requires extensive disclosure about the FPI’s business and
operations.
 However, Form 20-F may also be filed as a registration statement for
ordinary shares when an FPI is not engaged in a public offering of its
securities, but is still required to be registered under the Exchange
Act.
 For example, when an FPI reaches the holder of record threshold under Section
12(g) of the Exchange Act, and there is no other exemption available.
 “Unsponsored” ADRs must be registered on Form F-6.
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Which Registration Form Should be Used?
(cont’d)
 Certain Canadian issuers may take advantage of the MultiJurisdictional Disclosure System (“MJDS”), which allows a shorter
form of disclosure and incorporation by reference to Canadian
disclosures.
 Once an FPI has been subject to the U.S. reporting requirements for
at least 12 calendar months, it may use Form F-3 to offer securities
publicly in the United States.
 Form F-3 is a short-form registration statement (analogous to Form S-3 for U.S.
domestic issuers) and may be used by an FPI if the FPI meets both the form’s
registrant requirements and the applicable transaction requirements.
 Form F-3 permits an FPI to disclose minimal information in the prospectus included
in the Form F-3 by incorporating by reference the more extensive disclosures
already filed with the SEC under the Exchange Act, primarily in the FPI’s most
recent Annual Report on Form 20-F and its Forms 6-K.
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Industry Guide 3
 Provides guidelines for statistical disclosures by foreign banks and
bank holding companies in SEC filings.
 Market practice to also meet guidelines for unregistered offerings.
 Statistical disclosures can be included in the registration statement
itself or incorporated by reference from the FPI’s annual report or
quarterly/period reports to shareholders.
 Generally, the data provided must be for each of the last three or five
fiscal years, plus any interim period if necessary to keep the
information from being misleading.
 Available at http://www.sec.gov/about/forms/industryguides.pdf.
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Industry Guide 3
 Guidelines require detailed disclosures regarding a foreign bank’s:
 assets, liabilities and equity accounts,
 interest rates and interest spreads,
 investment portfolio,
 loan portfolio,
 loan maturities,
 loan sensitivity to changes in interest rates,
 problem loans,
 loan concentrations,
 loan loss experience,
 other earning assets,
 deposits and
 return on equity and assets.
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44
Industry Guide 3 (cont’d)
 Disclosure requirements are applicable to the extent the requested
information is available.
 Since an FPI is required to disclose in the registration statement all
material information necessary to make what is disclosed not
misleading, the disclosures may in certain circumstances go beyond
the requirements of Industry Guide 3.
 However, the SEC has permitted deviations from the guidelines if
more meaningful disclosure with respect to a particular issue would
be provided as a result.
 If the required information is unavailable or cannot be gathered
without undue burden or expense to the FPI, the situation should be
brought to the attention of the SEC in the early stages of the
registration process.
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45
SEC Review Process
 The SEC’s review of the registration statement is an integral part of
the registration process and should be view as a collaborative effort.
 Once a registration statement is filed, a team of SEC Staff members
is assigned to review the filing, which consists of accountants and
lawyers, including examiners and supervisors.
 The SEC’s principal focus during the review process is to assess the
company’s compliance with the SEC’s registration and disclosure
rules, although the nature of some comments shade into substantive
review.
 The SEC considers the disclosures in the registration statement through the eyes
of an investor in order to determine the type of information that would be
considered material to an investor. The SEC Staff will closely review websites,
databases and magazine and newspaper articles, looking in particular for
information that they think should be included the registration statement or that
contradicts information included in the registration statement.
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46
SEC Review Process (cont’d)
 The review process is time-consuming. While there was a time
when the review process could be completed in roughly two months,
now given the length of many prospectuses and the complexity of
the company’s business and the nature of the issues raised in the
review process, it can take three to five months.
 Initial comments on the registration statement are provided in about 30 days;
however, depending on the SEC’s workload and the complexity of the filing, the
receipt of first-round comments may take longer.
 The SEC’s initial comment letter typically includes about 50 to 75 comments, with a
majority of the comments addressing accounting issues.
 The company and counsel will prepare a complete and often lengthy response. In
some instances, the company may not agree with the SEC Staff’s comments, and
may choose to schedule calls to discuss the matter with the SEC Staff.
 The company will file an amendment to the registration statement, and provide the
response letter along with any additional information.
 The SEC Staff generally tries to address response letters and amendments within
10 days, but timing varies considerably.
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47
FPIs
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48
What is a “Foreign Private Issuer?”
• An FPI is any issuer (other than a foreign government) incorporated
or organized under the laws of a jurisdiction outside of the U.S.,
unless more than 50% of the issuer’s outstanding voting securities
are held directly or indirectly by residents of the U.S., and any of the
following applies:
• the majority of the issuer’s executive officers or directors are U.S. citizens or
residents;
• the majority of the issuer’s assets are located in the U.S.; or
• the issuer’s business is principally administered in the U.S.
• Securities held of record by a broker, dealer, bank or nominee for the
accounts of customers residing in the U.S. are counted as held in the
U.S. by the number of separate accounts for which the securities are
held.
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49
Annual Qualification Test
• An FPI is only required to determine its status on the last business
day of the most recently completed second fiscal quarter.
• An FPI that obtains its issuer status is not immediately obligated to
comply with U.S. reporting obligations.
• Reporting obligations begin the first day of the FPI’s next fiscal year, when it is
required to file an annual report on Form 20-F for the fiscal year its issuer status
was determined (within four months of the end of that fiscal year).
• However, a foreign company that obtains FPI status following an
annual qualification test can avail itself of the benefits of FPI status
immediately.
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50
How Does an FPI Become Subject to U.S. Reporting
Requirements?
• An FPI will be subject to the reporting requirements under U.S.
federal securities laws if:
• it registers with the SEC the public offer and sale of its securities under the
Securities Act;
• it lists a class of its securities, either equity or debt, on a U.S. national securities
exchange (e.g., NYSE and Nasdaq); or
• within 120 days after the last day of its first fiscal year in which the issuer had total
assets that exceed $10,000,000 and a class of equity securities held of record by
either: (1) 2,000 or more persons or (2) 500 persons who are not “accredited
investors” in the United States (or, in the case of an FPI that is a bank holding
company, if it had total assets that exceeded $10,000,000 and a class of equity
securities held of record by either 2,000 or more persons).
• However, an FPI may also deregister more easily than a domestic
issuer.
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51
Considerations for Being a Public Company in the
U.S.
• Foreign issuers usually weigh having greater access to capital and
the imprimatur of success associated with a public offering in the U.S.
with the following concerns:
• Heightened disclosure standards
• Corporate governance considerations, stemming from SRO requirements and
requirements under the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”)
• Accounting related disclosures
• Possibility for exiting the system (deregistration)
• Litigation exposure
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Benefits Available to FPIs
 A FPI may exit (or deregister) the U.S. reporting regime more easily
than a U.S. issuer
 Quarterly reports: A FPI is not required to file quarterly reports
 Proxies: A FPI is not required to file proxy statements
 Ownership reporting: No Section 16 reporting
 Governance: A FPI may choose to rely on certain home-country
practices
 XBRL: Temporary XBRL relief for FPIs
 Internal controls: Annual internal control reporting
 Executive compensation: As a FPI, certain of the more onerous
executive compensation disclosure requirements are not applicable
 IFRS without GAAP reconciliation
 12g3-2(b) exemption
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53
Confidential Submissions
 Only certain kinds of FPIs may now confidentially submit registration
statements:
 An FPI that is listed or is concurrently listing its securities on a non-U.S. securities
exchange,
 An FPI that is being privatized by a foreign government, or
 An FPI that can demonstrate that the public filing of an initial registration statement
would conflict with the law of an applicable foreign jurisdiction.
 In addition, shell companies, blank check companies and issuers
with no or substantially no business operations are precluded from
using the confidential submission process.
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54
Confidential Submissions (cont’d)
 However, an FPI may still qualify as an “emerging growth company”
(“EGC”) under Title I of the Jumpstart Our Business Startups Act (the
“JOBS Act”), in which case it could still submit registration
statements confidentially, provided that:
 The FPI elects to be treated as an EGC; and
 The initial confidential submissions and all amendments are filed with the SEC no
later than 21 days prior to the FPI’s commencement of the road show.
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55
EGCs
 An EGC is defined as an issuer with total gross revenues of under $1
billion (subject to inflationary adjustment by the SEC every five
years) during its most recently completed fiscal year.
 A company remains an EGC until the earlier of five years or:
 the last day of the fiscal year during which the issuer has total annual gross
revenues in excess of a $1 billion (subject to inflationary indexing);
 the last day of the issuer’s fiscal year following the fifth anniversary of the date
of the first sale of common equity securities of the issuer pursuant to an
effective registration statement under the Securities Act;
 the date on which such issuer has, during the prior three-year period, issued
more than $1 billion in nonconvertible debt; or
 the date on which the issuer is deemed a “large accelerated filer.”
 An issuer will not be able to qualify as an EGC if it first sold its common stock in an
initial public offering (“IPO”) prior to December 8, 2011.
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56
Other EGC Accommodations
 For FPIs that are EGCs, the JOBS Act allows for a streamlined IPO
“on-ramp” process in order to phase-in some of the more
comprehensive and costly disclosure requirements. For instance, an
EGC has the option to do the following:
 Testing- the- Waters: An EGC is permitted to engage in oral or written
communications with qualified institutional buyers (“QIBs”) and institutional
accredited investors in order to gauge their interest in a proposed IPO, either prior
to or following the initial filing of the IPO registration statement.
 Research Reports: Broker-dealers are permitted to publish or distribute a research
report about an EGC that proposes to register or is in registration. The research
report will not be deemed an “offer” under the Securities Act regardless of whether
the broker-dealer intends on participating, or is currently participating, in the
offering.
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57
EGC Accommodations (cont’d)
 Audited Financials: An EGC is required to present only two years of audited
financial statements (as opposed to three years) in connection with its IPO
registration statement. In any other registration statement or periodic report, an
EGC need not include financial information within its selected financial data or in its
Management Discussion and Analysis disclosure for periods prior to those
presented in its IPO registration statement.
 Auditor Attestation Report on Internal Control: An EGC is exempt from the
requirement to obtain an attestation report on internal control over financial
reporting from its registered public accounting firm.
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58
Accounting Considerations
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59
Accounting Considerations
 FPIs that prepare their financial statements under U.S. GAAP will
find that the SEC will require additional disclosures and other
explanations in their financial statements.
 In addition, FPIs that prepare financial statements under U.S. GAAP
should be prepared to address SEC accounting comments regarding
their registration statements.
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60
Elimination of GAAP Reconciliation
 Modified financial disclosures
 Under Item 18 of Form 20-F, an FPI is required to make certain disclosures
regarding its financial statements.
 Traditionally, an FPI listing securities in the U.S. was required to either prepare its
financial statements in accordance with U.S. GAAP or reconcile its financial
statements to those rules.
 Most FPIs were obligated to provide information that was not otherwise required
under their home countries’ GAAP.
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61
Elimination of GAAP Reconciliation (cont’d)
 New SEC rules omit U.S. GAAP reconciliation requirements if an FPI
satisfies the following conditions:

The financial statements must be prepared in accordance with the English
language version of the International Financial Reporting Standards (“IFRS”)
as published by the International Accounting Standards Board (the “IASB”);

The FPI must state in the notes to the financial statements that its financial
statements are in compliance with IFRS as issued by the IASB; and

The FPI must provide an opinion by an independent auditor stating that the
financial statements are in compliance with IFRS as issued by the IASB.
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62
GAAP Reconciliation and IFRS Convergence
 General Instruction G to Form 20-F permits eligible foreign private
issuers to file only two years of statements of income, shareholders’
equity and cash flows prepared in accordance with IFRS for their first
year of reporting in accordance with IFRS.
 In its second year of IFRS reporting and thereafter, an FPI must
provide three years of audited IFRS financials.
 FPIs that do not prepare their financial statements in accordance
with IFRS as issued by the IASB can either:
 Continue to reconcile their financial statements to U.S. GAAP; or
 Include in their IFRS financial statements such additional information as is
necessary to comply with the IASB issued IFRS, as well as the jurisdiction specific
IFRS.
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63
Convenience Translations and Exchange Rates
 If the reporting currency is not the U.S. dollar, U.S. dollar-equivalent
financial statements or convenience translations are not permitted to
be included, except that an FPI may present a translation of the most
recent fiscal year and any subsequent interim period.
 The exchange rate used for any convenience translations should be
as of the most recent balance sheet date included in the registration
statement, except where the exchange rate of the most recent
practicable date would yield a materially different result.
 In addition, FPIs that do not prepare their financial statements in U.S.
dollars must provide disclosure of the exchange rate between the
reporting currency and the U.S. dollar.
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Corporate Governance Considerations
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65
Corporate Governance: Audit Committee
 Item 6.C.3 of Form 20-F requires an FPI to disclose the names and method of
operation of its audit committee (however, an FPI has no legal obligation to
establish an audit committee).
 Section 10A-3 of the Exchange Act, pursuant to Rule 10A(m) of the Exchange
Act and Section 301 of Sarbanes-Oxley, contains specific rules for how to
conduct and organize an audit committee (each securities exchange also
imposes its own set of rules regarding audit committees).
 An FPI is required to disclose in its periodic reports whether the audit committee
includes at least one financial expert.
 The audit committee must: (1) exercise “independence;” (2) possess the
authority to employ, compensate and oversee the work of the independent
auditors; (3) possess the authority to employ and compensate outside advisors;
and (4) implement procedures for handling complaints regarding accounting,
internal accounting control or auditing matters, including “confidential,
anonymous submission by employees of the issuer of concern regarding
questionable accounting or auditing matters.
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66
Audit Committee: Composition and
Exemptions
 Each audit committee member must be a member of the board of directors
of the issuer, and must be otherwise independent.
 Under Rule 10A-3(b) of the Exchange Act, in order to maintain
“independence,” an audit committee member may not (except in his or her
capacity as a member of the audit committee, the board of directors or any
other board committee):
 Accept directly or indirectly any consulting, advisory, or other compensatory fee from the issuer
or any subsidiary thereof, provided that, unless the rules of the national securities exchange or
national securities association provide otherwise, compensatory fees do not include the receipt
of fixed amounts of compensation under a retirement plan (including deferred compensation)
for prior service with the listed issuer (provided that such compensation is not contingent in any
way on continued service); or
 Be an affiliated person of the FPI or any subsidiary of the FPI.
Recognizing that there may be conflicts of law between home-country and
domestic practices, the SEC established exemptions to the independence
requirement tailored to accommodate differing global practices (e.g.,
employee represented, two-tiered board system, controlling security holder
representation, foreign government representation and board of auditors).
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Audit Committee: Financial Experts
 Under Item 16A of Form 20-F, an FPI is required to disclose whether its
audit committee has at least one “audit committee financial expert” (“ACFE”).
 An FPI must disclose the name of the ACFE and whether that person is deemed
“independent,” as defined under Rule 10A-3(b) of the Exchange Act.
 An ACFE is defined as any person with the following attributes (obtained through
education and experience by serving as an officer, accountant, or auditor, by
supervising such individuals, or any other relevant experience):
 An understanding of generally accepted accounting principles and financial statements;
 The ability to assess the general application of such principles in connection with the
accounting for estimates, accruals and reserves;
 Experience preparing, auditing, analyzing, or evaluating financial statements that present a
breadth and level of complexity of accounting issuers that are generally comparable to
those raised by the issuer’s financial statements or experience actively supervising one or
more persons engaged in such activities;
 An understanding of internal control over financial reporting; and
 An understanding of audit committee functions.
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Corporate Governance: Compensation
Committee
 Under Item 6.C.3 of Form 20-F, an FPI must disclose information
regarding its compensation committee, including the names of
committee members and a summary of the terms under which the
committee operates.
 Each securities exchange may impose specific disclosure
requirements with respect to compensation committees.
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69
Ongoing Reporting Obligations and
Governance
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70
Annual Report on Form 20-F
 The information required to be disclosed in an Annual Report on
Form 20-F includes, but is not limited to, the following:
 operating results;
 liquidity and capital resources;
 trend information;
 off-balance sheet arrangements;
 consolidated financial statements and other financial information;
 significant business changes;
 selected financial data;
 risk factors;
 history and development of the FPI;
 business overview; and
 organizational structure.
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71
Annual Report on Form 20-F (cont’d)
 A Form 20-F also must contain a description of the FPI’s corporate
governance and a statement regarding those corporate governance
practices that conform to its home-country requirements and not
those of the U.S. national securities exchanges on which its
securities are listed.
 An FPI must also disclose information relating to changes in, and
disagreements with, the FPI’s certifying accountant, including a
letter, which must be filed as an exhibit, from the former accountant
stating whether it agrees with the statements furnished by the FPI
and, if not, stating the respects in which it does not agree.
 An FPI may also be required to disclose specialized information
(e.g., mine health and safety and oil and gas operations that are
material to its business operation or financial position).
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Reports on Form 6-K
 Reports on Form 6-K generally take the place of Quarterly Reports on Form
10-Q (which include financial reports) and Current Reports on Form 8-K
(which include disclosure on material events) that U.S. domestic issuers are
required to file.
 Unlike Form 10-Q or Form 8-K, there are no specific disclosures required by
Form 6-K. Instead, an FPI must furnish under cover of Form 6-K information
that it:
 makes or is required to make public pursuant to the laws of the jurisdiction of its
domicile or the laws in the jurisdiction in which it is incorporated or organized;
 files or is required to file with a stock exchange on which its securities are traded
and which was made public by that exchange; or
 distributes or is required to distribute to its security holders.
 Reports on Form 6-K must be “furnished” to the SEC promptly after the
information is made public by an FPI, as required by the country of its
domicile or under the laws of which it was incorporated or organized, or by a
foreign securities exchange with which the FPI has filed the information.
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73
Sarbanes-Oxley Requirements
 Section 302 of Sarbanes-Oxley requires certifications by an FPI’s
CEO/CFO regarding the effectiveness of the FPI’s disclosure
controls and procedures, the completeness and accuracy of the
FPI’s reports filed under Section 13(a) and 15(d) of the Securities
Act, and any deficiencies in, and material changes to, the FPI’s
internal control over financial reporting.
 Section 302 reporting begins once the FPI is an SEC registrant.
 These certifications must be included in the FPI’s Form 20-F.
 Other reports filed or furnished by the FPI, such as reports on Form 6-K, are not
subject to the certification requirements.
 Section 404 of Sarbanes-Oxley requires an annual report by both
management and external auditors regarding the effectiveness of the
company’s internal controls over financial reporting.
 Section 404 reporting begins with the second annual filing with the SEC.
 FPIs that are “non-accelerated” filers do not have to provide the auditor’s
attestation.
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74
Disclosure Controls and Procedures
 “Disclosure controls and procedures” are controls and other
procedures designed to ensure that the information required to be
disclosed in the reports filed under the Exchange Act, on a timely
basis, are recorded, processed, summarized and reported.
 Disclosure controls and procedures include, but are not limited to,
controls and procedures designed to ensure that information
required to be disclosed by a company in its Exchange Act reports is
appropriately accumulated and communicated to the company’s
management, including its principal executive and financial officers,
to allow timely decisions regarding required disclosure.
 Important to have an “up the chain” process of reporting from lower
managers to CEO and CFO.
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Enhanced Disclosure Obligations for FPIs
 There are enhanced disclosure requirements regarding an FPI’s Annual
Report on Form 20-F.
 The enhanced disclosures apply to the following areas:
 Changes in or disagreements with the FPI’s certifying public accountant
 ADR fees, payment and other charges
 Differences in corporate governance practices
 Under Item 16G of Form 20-F, an FPI must provide a summary of the
differences between its corporate governance practices and those applicable to
U.S. companies under the relevant securities exchange’s listing rules.
 Securities exchanges, such as the NYSE and Nasdaq, require disclosures of
differences between an FPI’s corporate governance, based on home-country
practice and the requirements of the exchange.
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76
Financial Statement Reporting
 An FPI must provide significant disclosures regarding its financial
condition under Item 8 and Item 18 of Form 20-F.
 Item 8 of Form 20-F sets forth the financial information that must be
included, as well as the periods covered and the age of the financial
statements.
 In addition, Item 8 obligates an FPI to disclose any legal or arbitration proceedings
involving a third party that may have, or have recently had, a significant impact on
the FPI’s financial position or profitability, as well as any significant changes since
the date of the annual financial statements (or since the date of the most recent
interim financial statements).
 Item 18 of Form 20-F addresses the requirements for an FPI’s
financial statements and accountants’ certificates that must be
furnished with the Form 20-F.
 Under Item 18 of Form 20-F, an FPI that presents its financial information on a
basis other than U.S. GAAP or IFRS as issued by IASB must nevertheless provide
all of the information required by U.S. GAAP and Regulation S-X.
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77
Financial Statement Reporting (cont’d)
 In the past, certain FPIs were permitted to omit segment data from their
financial statements that were otherwise prepared in accordance with U.S.
GAAP pursuant to Item 17 of Form 20-F, but the SEC has eliminated this
accommodation.
 However, Item 17 compliance will still be permitted for non-issuer financial statements such as
those pursuant to Rules 3-05, 3-09, 3-10(i) and 3-14 of Regulation S-X, as well as non-issuer
target company financial statements included in Forms F-4 and proxy statements.
 Item 17 will also continue to be permitted for pro forma information pursuant to Article 11 of
Regulation S-X.
 An FPI that prepares financial statements in accordance with U.S. GAAP is
now required to provide financial information to the SEC in XBRL data
format (as well as post XBRL data on its publicly available website).
 Detailed tagging of footnotes and schedules for fiscal periods ending on or after June 15, 2012
is also required.
 An FPI that prepares financial statements in accordance with IFRS as issued by the IASB will
not be required to provide financial information in an interactive data format using XBRL until
the SEC specifies the XBRL taxonomy for IFRS financial statements.
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78
Reporting Obligations of Beneficial Owners
 Insiders of an FPI are not subject to the short-swing profit limits set
forth in Section 16(b) of the Exchange Act, nor are they required to
comply with the Section 16(a) reporting requirements (disclosing
holdings of, and transaction in, equity securities of the FPI).
 However, beneficial owners, subject to the disclosure requirement
under Section 13(g) of the Exchange Act, are required to file with the
SEC a statement on either Schedule 13D or Schedule 13G.
 Rule 13d-1 of the Exchange Act mandates that a person who acquires, directly or
indirectly, beneficial ownership of a class of registered equity security, must file a
statement containing the information required by Schedule 13D with the SEC,
within 10 business days.
 Alternatively, certain holders of securities of an FPI may be permitted to report their
beneficial ownership on Schedule 13G, pursuant to Rule 13d-1(b). The disclosures
under Schedule 13G are considerably less detailed than those required by
Schedule 13D.
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Specialized Disclosure Requirements
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Dodd-Frank Act Governance and Disclosure
Provisions
 Many provisions of The Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Dodd-Frank”) have extraterritorial effect
and apply to foreign issuers, including financial institutions that
conduct banking activities.
 Executive compensation and corporate governance provisions:
 Sec. 951:
 Sec. 952:
 Sec. 953:
 Sec. 954:
 Sec. 955:
 Sec. 972:
Say on Pay – not applicable to FPIs
Compensation Committee Independence
Pay vs. Performance & Pay Disparity
Compensation Clawbacks
Employee and Director Hedging Disclosure
Disclosure of CEO and Chairman Separation
 Specialized disclosure provisions:
 Sec. 956: Executive Compensation at Financial Institutions
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Compensation Committee Independence (Sec.
952) and Compensation Clawbacks (Sec. 954)
 Independent Compensation Committee
 Applies to FPIs unless the FPI provides annual disclosure of the reasons it does not have an
independent compensation committee.
 For FPIs with two-tiered board, “board of directors” means non-management board.
 Independence of Compensation Consultants and Disclosure of Conflicts of
Interest
 Unclear if applies to FPIs.
 Proposing release notes that Sec. 952 “makes no distinction between domestic and foreign
issuers….”
 However, proposed implementation through Regulation S-K, and FPIs have historically been
exempted from similar requirements.
 Compensation Clawbacks
 Unclear if applies to FPIs and no rules yet proposed.
 Exchanges must implement rules mandating that listed companies (1) adopt and disclose an
incentive compensation clawback policy and (2) impose a clawback mechanism disgorging
certain incentive compensation of executives in the event of a restatement.
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Provisions for “Covered Financial Institutions”
(Sec. 956)
 Who is covered?
 Any FPI (or U.S. entity within an FPI) that is a “covered financial institution” with $1
billion or more in total consolidated assets.
 Includes depositary institutions and their holding companies, registered brokerdealers and investment advisers.
 “Larger covered financial institutions,” entities with $50 billion or more in total
consolidated assets, are subject to additional requirements.
 Sec. 956 establishes added disclosure and substantive regulation of
financial institution compensation practices.
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83
Disclosure of Financial Institution
Compensation
 A covered financial institution must provide an annual report to regulators,
disclosing:
 The structure of its incentive-based compensation arrangements sufficient to determine
whether the structure provides “excessive compensation, fees, or benefits” or “could lead to
material financial loss” to the institution.
 For larger covered financial institutions, specific descriptions of incentive compensation for
executive officers and other covered persons who have the ability to expose the institution to
possible material losses.
 Level of detail provided commensurate with size and complexity of covered
financial institution and scope of nature of incentive compensation.
 Covered financial institutions may not establish or maintain any type of
compensation arrangement that encourages inappropriate risks by providing
a covered person with excessive compensation.
 Agencies to determine reasonableness of compensation.
 For larger covered financial institutions, additional requirements:
 Mandatory deferrals for executive officers (at least 50% of incentive compensation deferred
over at least 3 years); and
 Board review of incentive compensation of “key risk taker” employees.
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84