Recent Changes to Disclosure Requirements for Foreign Private Issuers
In recent months, the Securities and Exchange Commission (SEC) has issued a number of rules that will directly impact the ongoing reporting obligations of foreign private issuers (FPIs). Among other changes, the rules make significant changes to Form 20-F, including changes to the cover, Item 6 and Item 16E, and add new Items 16J and 16K, as well as new exhibits to be filed, and also add material cybersecurity events to the items that may trigger a report on Form 6-K. At the same time, for the first time in decades the SEC added a new ongoing reporting form for FPIs, Form F-SR, requiring quarterly reporting of issuer share repurchases. The new disclosure requirements are accompanied by other substantial changes, including required new compensation clawback policies, changes to the insider trading defense under Rule 10b5-1(c)(1), and a series of other important regulatory changes, which we discuss in greater detail below.1
New Clawback Policy Requirement for Listed Companies
On October 26, 2022, the SEC adopted Rule 10D-1 and other rule amendments under Section 10D of the Securities Exchange Act of 1934 (Exchange Act) to implement the incentive-based compensation recovery provision, referred to as the “clawback” provision, of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Clawback Rules). The Clawback Rules required national securities exchanges (such as the New York Stock Exchange (NYSE) and Nasdaq) to adopt listing standards under which issuers must implement and enforce policies that require the clawback of incentive-based compensation received by any current or former executive officer during the three completed fiscal years immediately preceding the date of a required restatement of an issuer’s filed financial statements due to the issuer’s material noncompliance with any financial reporting requirement under the securities laws.2 The new rules also adopt changes to Form 20-F, including changes to the cover, to Item 6, and to the exhibits.
National securities exchanges were required to propose listing standards complying with the Clawback Rules by February 24, 2023, and to have their respective listing standards effective no later than November 28, 2023. In February 2023, both the NYSE and Nasdaq filed their proposed listing standards. In June 2023, the SEC approved the proposed clawback listing standards of the NYSE and Nasdaq, including amendments that delay the effective date of the rules to October 2, 2023.
The listing standards generally require that:
- Every listed company adopt a written clawback policy providing that the company will recover (in a reasonably prompt manner) any erroneously awarded incentive-based compensation if the company is required to prepare an accounting restatement due to material non-compliance with financial reporting.
- The clawback policy cover any incentive-based compensation (including cash and equity awards) received on or after the effective date of the listing standards:
- Received by an executive officer3 (beginning when such person became an executive officer)
- Received by a person who served as an executive officer during the performance period for that incentive-based compensation
- While the company has a class of securities listed on the exchange
- During the three completed fiscal years immediately preceding the date the company is required to prepare an accounting restatement and any transition period, if applicable.
- The amount subject to the clawback is the gross pre-tax amount of incentive-based compensation that would have been received in accordance with the restated amounts.
- The listing standards also provide the manner in which the clawback amount should be calculated if the incentive-based compensation was based on stock price or total shareholder return.
- The company not be permitted to indemnify persons subject to the clawback policy.
- The clawback provisions be followed, with the listed company facing delisting for non-compliance.
The Clawback Rules provide for three limited exceptions to the recovery of amounts under the clawback policy: (1) if after the listed company has made reasonable documented attempts of recovery, the cost of recovery paid to a third party to enforce the policy exceeds the amount to be recovered; (2) if the clawback would violate home country law, which must be confirmed by an opinion of home country counsel in a form acceptable to the relevant exchange; or (3) if the clawback would cause a tax-qualified retirement plan to fail to meet certain requirements under the law. Any of the foregoing exceptions require a determination by either (i) the independent members of the executive compensation committee or (ii) if no such committee of the board exists, the majority of the independent directors of the board.
Revised Periodic Disclosure
The Clawback Rules affect related disclosure for FPIs, as the clawback policy adopted in compliance with the Clawback Rules will be required to be filed as an exhibit to the FPI’s annual report on Form 20-F. The cover of Form 20-F was also amended to add two new checkboxes indicating (1) whether the financial statements filed in the annual report reflect the correction of an error to previously-issued financial statements and (2) whether such corrections rise to the level of restatements that require a recovery analysis of incentive-based compensation.
Additionally, Form 20-F (Item 6. Directors, Senior Management and Employees) was amended to require FPIs to disclose actions taken to recover erroneously awarded compensation. In particular, if at any time during or after the FPI’s last completed fiscal year it was required to prepare a restatement that triggered its clawback policy, or if there was an outstanding balance as of the end of the last completed fiscal year of erroneously awarded compensation from the application of that policy to a prior restatement, the FPI would be required to disclose the following (in Inline XBRL):
- The date on which the issuer was required to prepare an accounting restatement
- The aggregate dollar amount of erroneously awarded compensation attributable to such accounting restatement (or, if the amount is indeterminable at the time of filing, an explanation as to why such amount has not yet been determined and related disclosures in the next filing that is subject to this disclosure obligation)
- If the financial reporting measure is related to a stock price or total shareholder return metric, the estimates used to determine the amount of erroneously awarded compensation attributable to such restatement and an explanation of the methodology used for such estimates
- The aggregate amount of erroneously awarded compensation subject to the clawback policy that remains outstanding as of the end of its last completed fiscal year
- If the issuer determines that recovery is impracticable, for each current and former named executive officer and for all other current and former executive officers as a group, the amount of recovery forgone and a brief description of the reason the issuer decided in each case not to pursue recovery
- For each current and former named executive officer, the amount of erroneously awarded compensation still owed that had been outstanding for 180 days or longer since the date the issuer determined the amount owed.
FPIs will be required to develop and adopt a compliant clawback policy within 60 days of the listing standards being made effective by the exchanges. In June 2023, the SEC approved the proposed clawback listing standards of both the NYSE and Nasdaq, including amendments that delay the effective date of the rules to October 2, 2023. As a result, listed issuers will be required to adopt compliant clawback policies by no later than December 1, 2023.
Compliance with the amended Form 20-F disclosure requirements is expected to be simultaneous with the adoption of clawback policies, so the related disclosure should be included in annual reports for fiscal year 2023.
Insider Trading Defense, Policies, and Disclosure
On December 14, 2022, the SEC amended Rule 10b5-1(c)(1) under the Exchange Act to add new conditions and limitations designed to address what the SEC believed to be abuses of the rule. The SEC also adopted new disclosure requirements related to insider trading policies, adding new Item 16J to Form 20-F.
Amendments to Rule 10b5-1 Defense
Section 10(b) and Rule 10b-5 of the Securities Exchange Act prohibit the purchase or sale of a security on the basis of material nonpublic information. Rule 10b-5 makes it illegal for any person to make any untrue statement of material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or to use any measure or engage in any act, practice, or course of business which operates as a fraud or deceit upon any person, in connection with the purchase or sale of any security. Rule 10b5-1(c)(1) provides an affirmative defense against alleged violations of Rule 10b-5 and Section 10(b) (insider trading liability) in circumstances where, subject to certain conditions, the trade was pursuant to a binding contract, an instruction to another person to execute the trade for the instructing person’s account, or a written plan adopted when the trader was not aware of material nonpublic information.
A Rule 10b5-1 plan is an arrangement between a company insider and a third party, typically a broker. Trades made pursuant to the plan are subject to an affirmative defense to insider trading allegations only if (1) the plan was adopted at a time when the person creating the plan was not aware of any material nonpublic information about the company or its securities; (2) the plan’s terms specify a non-discretionary trading method, either (a) listing the amount of securities to be purchased or sold and the price and date for each purchase or sale, (b) setting forth a written formula, algorithm, or computer program for determining the amount, price, and date for each transaction, or (c) delegating the ability to determine the amount, price, and date to a third party and not allowing the plan creator to exercise any subsequent influence over how, when, or whether to make purchases or sales, with all purchases made pursuant to the plan; and (3) the plan was entered into in good faith and not as part of a plan or scheme to evade the prohibitions of or to circumvent Rule 10b5-1.
The amendments imposed the following new conditions on the use of the 10b5-1(c)(1) affirmative defense:
- A cooling-off period for directors and officers of the later of (1) 90 days following plan adoption or modification or (2) two business days following the disclosure in certain periodic reports of the issuer’s financial results for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days following plan adoption or modification) before any trading can commence under the trading arrangement
- A cooling-off period of 30 days for persons other than issuers or directors and officers before any trading can commence under the trading arrangement or modification
- A condition for directors and officers to include a representation in their Rule 10b5-1 plan certifying, at the time of the adoption of a new or modified plan, that (1) they are not aware of material nonpublic information about the issuer or its securities and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-54
- A limitation on the ability of anyone other than issuers to use multiple overlapping Rule 10b5-1 plans and rely on the affirmative defense for a single-trade plan to one such plan during any consecutive 12-month period
- A condition that all persons entering into a Rule 10b5-1 plan must act in good faith with respect to that plan
For more details on the Rule 10b5-1 amendments and obligations under the amended rules, read our Advisory here.
Amended Periodic Disclosures
The 10b5-1 rule amendments also added new Item 16J to Form 20-F, which will require FPIs to disclose whether they have adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of the issuer’s securities by directors, officers, and employees or the issuer that are reasonably designed to promote compliance with insider trading laws, rules, and regulations, and any listing standards applicable to the issuer. If the issuer has not adopted such insider trading policies and procedures, it must explain why it has not done so. If the issuer has adopted insider trading policies and procedures, it must disclose such policies and procedures and file their insider trading policies and procedures as an exhibit to its annual report on Form 20-F.
For 10b5-1 plan requirements, the effective date was February 27, 2023. Trading plans adopted on or after that date must satisfy amended Rule 10b5-1 to benefit from its affirmative defense. Existing trading plans can be kept in place but, if modified on or after that date to change the amount, price, or timing of trades, will need to comply with amended Rule 10b5-1 to benefit from the affirmative defense.
FPIs will be required to comply with the new Item 16J disclosure requirements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023 (or October 1, 2023, for smaller reporting companies). For example, for FPIs with a December 31 fiscal year end, the disclosure required under Item 16J will be required to be included in the annual report on Form 20-F for fiscal year 2024 (expected to be filed in 2025).5
Share Repurchase Disclosure
On May 3, 2023, the SEC amended the disclosure requirements pertaining to issuer share repurchases. Most significantly for FPIs, the amendments introduce a new reporting obligation,6 requiring quarterly filings that include daily share repurchase data on new Form F-SR. Although the amendments retain (and add to) the qualitative share repurchase disclosure in Form 20-F (as described below), the current quantitative requirement to provide monthly share repurchase disclosure in such form has been eliminated.
Current Disclosure Requirements
Form 20-F, which FPIs are required to file with the SEC on an annual basis, currently requires in Item 16E (Purchases of Equity Securities by the Issuer and Affiliated Purchasers) disclosure of purchases of shares (or other units) of any class of an issuer’s equity securities registered under Section 12 of the Securities Exchange Act of 1934 (the Exchange Act), aggregated on a monthly basis, made by or on behalf of such issuer or any affiliated purchaser.7 Item 16E further requires disclosure of whether such purchases were made pursuant to a publicly announced share repurchase plan or program or otherwise via open-market transactions, tender offers, or in satisfaction of the company’s obligations upon exercise of outstanding put options issued by the company. FPIs do not currently have a quarterly reporting obligation under the Exchange Act.8
New Disclosure of Daily Share Repurchases
Under the amendments and new Form F-SR, FPIs will be required to make quarterly filings that present the following disclosures in tabular format (in Inline XBRL) for each date on which a purchase of shares (or units) is executed by (or on behalf of) an issuer or any affiliated purchaser:
- The execution date
- Identification of the class of securities purchased
- The total number of shares (or units) purchased, whether or not made pursuant to publicly announced plans or programs
- The average price paid per share (or unit), reported in U.S. dollars, and excluding costs of execution
- The total number of shares (or units) purchased as part of publicly-announced repurchase plans or programs
- The aggregate maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the publicly announced repurchase plans or programs
- The total number of shares (or units) purchased on the open market
- The total number of shares (or units) purchased that are intended to qualify for the Rule 10b-18 safe harbor
- The total number of shares (or units) purchased pursuant to a plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c). Issuers must also disclose, by footnote to the daily repurchase table, the date any plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) was adopted or terminated.
FPIs will also be required to disclose on the form (via check-box above the daily repurchase table) if any directors or members of senior management9 purchased or sold shares (or units) of a registered class of the issuer’s equity securities that are subject to a publicly announced repurchase plan or program within four business days before or after (1) the announcement of such repurchase plan or program or (2) the announcement of an increase of an existing share repurchase plan or program. To comply with this requirement, FPIs will need to receive share trading information on a regular basis from their directors and senior management.
FPIs will be required to file the Form F-SR at the end of every quarter in which a share repurchase was made by or on behalf of such FPI or any affiliated purchaser, which filing will be due 45 days after the end of an FPI’s fiscal quarter. If an FPI’s Form 6-K disclosures satisfy the Form F-SR requirements, it can incorporate by reference such Form 6-K disclosures into its Form F-SR.
Importantly, the Form F-SR will be treated under U.S. securities laws as “filed” instead of “furnished.” For FPIs, the only periodic reporting under the Exchange Act to date that has been deemed as “filed” (as opposed to “furnished”) has been the annual report on Form 20-F. Section 18 of the Exchange Act imposes liability for material misstatements or omissions contained in reports and other information filed with the SEC. For this reason, although FPIs are permitted to “file” a Form 6-K, they generally do not unless, for example, they seek to incorporate disclosure by reference into a Securities Act filing in connection with a securities offering. Note, however, that other anti-fraud provisions of the U.S. federal securities laws, including Section 10(b) of the Exchange Act, still apply even to "furnished" reports and information.
Revised Periodic Disclosures
The amendments also revise the disclosure requirements in Form 20-F. Specifically, the amendments eliminate the current requirements in Item 16E to provide tabular disclosure of monthly repurchase data. Instead, Item 16E will now require FPIs to disclose (in Inline XBRL): (1) the objectives or rationales for each repurchase plan or program and the process or criteria used to determine the amount of repurchases and (2) any policies and procedures (including restrictions) relating to purchases and sales of the issuer’s securities by its directors and senior management during a repurchase program.
The amendments also continue to require disclosure in Item 16E of the number of shares (or units) purchased other than through a publicly announced plan or program and the nature of the transaction (e.g., whether the purchases were made in open-market transactions, tender offers, in satisfaction of the issuer’s obligations upon exercise of outstanding put options issued by the issuer, or other transactions), as well as the following disclosures for publicly announced repurchase plans or programs: (1) the date each plan or program was announced; (2) the dollar amount (or share or unit amount) approved; (3) the expiration date (if any) of each plan or program; (4) each plan or program that has expired during the period covered by the relevant daily repurchase tables; and (5) each plan or program the issuer has determined to terminate prior to expiration or under which the issuer does not intend to make further purchases.
If an issuer believes any of the required disclosures would result in misleading or confusing information, it may provide additional disclosure to put the required information in context.
FPIs will be required to comply with the new share repurchase disclosure and tagging requirements in new Form F-SR beginning with the Form F-SR that covers the first full fiscal quarter that begins on or after April 1, 2024. The Form 20-F narrative disclosure that relates to the Form F-SR filings will be required starting in the first Form 20-F filed after the first Form F-SR has been filed. For example, FPIs with a December 31, 2023 fiscal year end that report using Form 20-F will be required to (1) begin filing new Form F-SR for the quarter ending June 30, 2024 and (2) include the amended disclosures in Item 16E for the Form 20-F to be filed with respect to the fiscal year ended December 31, 2024.10
Cybersecurity Incident Disclosure
On July 26, 2023, the SEC adopted final rules requiring issuers (including FPIs) to disclose material cybersecurity incidents as well as periodic disclosure about cybersecurity risk management, strategy, and governance (the Cybersecurity Rules).
These new requirements follow the interpretive guidance that the SEC's Division of Corporation Finance issued in 2011 concerning operating companies’ disclosure obligations relating to cybersecurity (2011 Staff Guidance) and the further interpretative guidance that the SEC issued in 2018 to expand upon the 2011 Staff Guidance and address the importance of cybersecurity policies and procedures, as well as the application of insider trading prohibitions in the context of cybersecurity (2018 Interpretive Release). In adopting the Cybersecurity Rules, the SEC noted that the 2018 Interpretive Release remains in place, as it treats a number of topics not covered by the Cybersecurity Rules, such as incorporating cybersecurity-related information into risk factor, management’s discussion and analysis, and description of business disclosure. The SEC also reinforced its expectation expressed in the 2018 Interpretive Release that an issuer's financial reporting and control systems should be designed to provide reasonable assurance that information about the range and magnitude of the financial impacts of a cybersecurity incident would be incorporated into its financial statements on a timely basis.
New Disclosure Requirements
Once effective, the Cybersecurity Rules will amend Form 20-F to add a new Item 16K, requiring FPIs to disclose (in Inline XBRL) their processes, if any, for assessing, identifying, and managing material risks from cybersecurity threats. This disclosure would include (1) whether and how any such processes have been integrated into their overall risk management system or processes; (2) whether they engage assessors, consultants, auditors, or other third parties in connection with such processes; and (3) whether they have processes to oversee and identify such risks from cybersecurity threats associated with the use of any third-party service provider. New Item 16K would also require disclosure as to whether any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, have materially affected or are reasonably likely to materially affect the FPI, including its business strategy, results of operations or financial condition. “Cybersecurity incident,” “cybersecurity threat,” and “information systems” are defined in Item 16K. Under Item 16K, FPIs will also be required to describe (1) the board of directors’ oversight of risks from cybersecurity threats, including, if applicable, any board committee or subcommittee responsible for the oversight of risks from cybersecurity threats and the processes by which the board or such committee is informed about such risks and (2) management’s role and expertise in assessing and managing material risks from cybersecurity threats, including (a) whether and which management positions or committees are responsible for assessing and managing such risks, and the relevant expertise of such persons or members; (b) the processes by which such persons or committees are informed about and monitor the prevention, detection, mitigation, and remediation of cybersecurity incidents; and (c) whether such persons or committees report information about such risks to the board of directors or a committee or subcommittee of the board of directors.11
The Cybersecurity Rules will also amend General Instruction B to Form 6-K to require an FPI to furnish information on material cybersecurity incidents that it makes or is required to make public or otherwise discloses pursuant to the law of its home jurisdiction, to any stock exchange or to its security holders.
FPIs will be required to include the new cybersecurity disclosure in Form 20-F for fiscal years ending on or after December 15, 2023. For FPIs with a December 31 fiscal year end, the new disclosure will be required to be included in the annual report on Form 20-F for fiscal year 2023 (to be filed by April 30, 2024). With respect to compliance with the incident disclosure requirements in Form 6-K, FPIs will be required to comply on the later of 90 days after the date of publication of the Cybersecurity Rules in the Federal Register or December 18, 2023.
We summarize the applicable effective dates and deadlines for compliance with the new disclosure requirements in the table below:
|Develop and adopt a compliant clawback policy pursuant to national exchange listing standards||December 1, 2023|
Form 20-F amendments:
|New disclosure to be included in annual report on Form 20-F for fiscal year 2023. (For issuers with a December 31 year end, this would be the Form 20-F to be filed by April 30, 2024.)|
|Insider Trading Defense, Policies, and Disclosure|
New conditions on 10b5-1(c)(1) affirmative defense to insider trading
|February 27, 2023|
Form 20-F amendments:
New disclosure to be included in the first annual report on Form 20-F that covers the first full fiscal period beginning on or after April 1, 2023 (or October 1, 2023, for smaller reporting companies). For issuers with a December 31 year end, this would be the Form 20-F with respect to the fiscal year ended December 31, 2024 (to be filed by April 30, 2025).
Quarterly filings on new Form F-SR that include daily share repurchase data
|Filings on Form F-SR to commence covering the first full fiscal quarter beginning on or after April 1, 2024. For issuers with a June 30 quarter end, the first Form F-SR would need to be filed no later than August 14, 2024 (i.e., 45 days after June 30) provided an applicable share repurchase was made during such quarter.|
Form 20-F amendments:
New disclosure to be included in the first annual report after the first Form-SR has been filed. For issuers with a December 31 year end, this would be the Form 20-F with respect to the fiscal year ended December 31, 2024 (to be filed by April 30, 2025).
Form 20-F amendment:
New disclosure to be included in annual report on Form 20-F for fiscal years ending after December 15, 2023. (For issuers with a December 31 year end, this would be the Form 20-F to be filed by April 30, 2024.)
Form 6-K amendment:
FPIs are required to comply by the later of 90 days after the date of publication of the new rules in the Federal Register or December 18, 2023.
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
For more details on the Clawback Rules, read our Advisory here.
“Executive officers” are defined as the issuer’s president, principal financial officer, principal accounting officer, any vice president in charge of a principal business unit, division, or function, and any other person who performs significant policy-making functions for the issuer. Executive officers of the issuer’s parent(s) or subsidiaries are deemed executive officers of the issuer if they perform such policy making functions for the issuer.
A modification or change to the amount, price, or timing of the purchase or sale of the securities (or to a written formula or algorithm or computer program that affects the amount, price, or timing of the purchase or sale of the securities) under a Rule 10b5-1 Plan is treated as a termination of the existing plan and the adoption of a new plan triggering a new cooling-off period. Because this type of modification or change is treated as the adoption of a new plan, the person making such modification or change must not be aware of material nonpublic information concerning the security or its issuer at the time of the modification or change, and the modified plan must comply with the amended rule to qualify for the affirmative defense.
For more details on SEC amendments with respect to Rule 10b5-1 and insider trading policy disclosures, read our Advisory here.
This Advisory assumes that the relevant FPI reports on the SEC forms that are specific to FPIs, such as Form 20-F and Form 6-K. For those FPIs that report on U.S. domestic forms, see our May 8, 2023 Advisory. Also note that, as filers using the Multijurisdictional Disclosure System (MJDS) are not currently required to provide repurchase disclosure analogous to that required in the Form 20-F, the SEC has not imposed the amended repurchase disclosure requirements on Canadian issuers that file using the MJDS.
The term “affiliated purchaser” for purposes of this item is defined in Exchange Act Rule 10b-18 as (1) a person acting, directly or indirectly, in concert with the issuer for the purpose of acquiring the issuer’s securities or (2) an affiliate who, directly or indirectly, controls the issuer’s purchases of such securities, whose purchases are controlled by the issuer, or whose purchases are under common control with those of the issuer; provided, however, that an “affiliated purchaser” shall not include a broker, dealer, or other person solely by reason of such broker, dealer, or other person effecting Rule 10b-18 purchases on behalf of the issuer or for its account, and shall not include an officer or director of the issuer solely by reason of that officer or director’s participation in the decision to authorize Rule 10b-18 purchases by or on behalf of the issuer.
On May 12, 2023, the U.S. Chamber of Commerce filed a lawsuit against the SEC in an effort to prevent the new share repurchase disclosure requirements from taking effect. While we cannot predict the ultimate outcome of the lawsuit, it could affect the effectiveness and compliance dates of the requirements discussed in this Advisory.