SEC Rule Change Relating to Foreign Securities in NASDAQ

TO: All NASD Members and NASDAQ Subscribers

On October 5, 1983, the Securities and Exchange Commission adopted a rule change which will require all foreign issuers seeking inclusion in NASDAQ to be registered pursuant to Section 12(g) of the Securities Exchange Act of 1934. This registration requires foreign issuers to file periodic reports with the Commission similar to those filed by domestic companies. The Commission action also provides that the 102 non-Canadian foreign securities included in NASDAQ as of October 5, 1983 are "grandfathered" and will be permitted to remain on NASDAQ indefinitely provided they satisfy all other requirements for continued inclusion. With respect to the 186 Canadian issues, they will be permitted to remain on NASDAQ, provided they continue to satisfy all other requirements, until January 2, 1986, at which time they must be registered pursuant to Section l2(g) in order to remain in the System. A copy of the Commission's order as well as lists of non-Canadian foreign securities and Canadian securities on NASDAQ as of October 5, 1983 are attached to this Notice.

This rule change will also prohibit the reinclusion of foreign securities which are removed from NASDAQ unless they subsequently become 12(g) registered. Accordingly, the failure by a foreign issuer to comply with any NASDAQ requirement would result in the removal of its securities from the NASDAQ System until it meets the SEC requirement for 12(g) registration.

Questions regarding this Notice may be directed to Gary W. Guinn, Assistant Director, NASDAQ Operations at (202) 728-8052.

Sincerely,

Molly G. Bayley
Vice President
NASDAQ Operations

Enclosure

NON-CANADIAN FOREIGN SECURITIES IN NASDAQ SYSTEM AS OF OCTOBER 5, 1983

CANADIAN SECURITIES IN NASDAQ SYSTEM AS OF OCTOBER 5, 1983

federal register

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 240

[Release Nos. 33-6493; 34-20264; File No. S7-951]

Foreign Securities

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

SUMMARY: The Commission today announces the adoption of revisions to a current rule, known as the information-supplying exemption which exempts certain foreign securities from registration under the Securities Exchange Act of 1934. These revisions generally treat foreign securities quoted on the automated quotation system of the National Association of Securities Dealers ("NASDAQ") the same as foreign securities listed on a United States ("U.S.") exchange. Generally, non-Canadian foreign securities currently quoted on NASDAQ could continue to rely on the exemption indefinitely subject to certain conditions. Canadian securities,. however, currently quoted on NASDAQ could continue to rely on the exemption until January 2, 1986. Revisions also are made to other rules to clarify the concept of voluntary entry into the U.S. capital markets.

EFFECTIVE DATE: October 14, 1983.

FOR FURTHER INFORMATION CONTACT: Carl T. Bodolus (202) 272-3246, Office of International Corporate Finance, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: Foreign private issuers whose securities are not trading on one of the national securities exchanges are now exempt from registering with the Commission. The Commission today is revising that exemption so that it will no longer be available to foreign issuers whose securities trade on NASDAQ. This change is being made because the Commission believes that trading on NASDAQ is substantially the same a8 trading on an exchange and therefore the information available for NASDAQ traded companies should be essentially the same as the information available for exchange traded companies. The Commission will "grandfather" foreign private issuers who are now trading on NASDAQ and relying on the exemption. Canadian issuers will be grandfathered for two years and all other foreign issuers will be grandfathered indefinitely. However, no additional foreign equity securities can begin trading on NASDAQ unless they are registered with the Commission.

I. Background

The Commission is adopting revisions to Rule 12g3-2 (17 CFR 240.12g3-2) ¹ under the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. 78a et seq. (1976 and Supp. Ill 1979)] that would terminate the availability of that exemptive rule to certain foreign issuers with securities quoted in NASDAQ and clarify several provisions of that rule.² Amendments to Rule 12g-3 (17 CFR 240.12g-3) and Rule 15d-5 (17 CFR 240.15d-5) relating to successor issuers further clarify the application of the periodic reporting requirements of the Exchange Act to issuers that acquire reporting issuers by the issuance of securities. The concept of the "essentially U.S. issuer" exemption in the definition of foreign private issuer in Rule 405 (17 CFR 230.405) and Rule 3b-4 (17 CFR 240-3b-4) is also revised. Rule 12g-l (17 CFR 240-12g-l) is also clarified.

The Commission solicited public comments on these changes in Release No. 33-6433 (October 28, 1982) [47 FR 50292]. One hundred sixty-three comment letters were received on the proposals.³ One hundred twenty-six were from individuals, thirteen from issuers, eight from the securities industry, five from law firms, three each from associations and banks maintaining facilities for American Depositary Receipts, two each from analysts and self-regulatory organizations, and one from a foreign securities exchange. Most commentators addressed only the proposal that the information-supplying exemption in Rule 12g3-2(b) be no longer available for securities quoted in an automated inter-dealer quotation system, i.e., NASDAQ.

II. Registration for NASDAQ Listing

Proposed paragraph (d) (3) of Rule 12g3-2 would have denied the information-supplying exemption to securities quoted on NASDAQ. Foreign securities quoted only in the pink sheets would continue to be exempt under the information-supplying exemption in Rule 12g3-2(b). Virtually all comments received addressed this proposal.

III. Other Revisions

The Commission received no adverse comments on the proposed revisions to the successor issuer rules and has adopted them without change.

Several commenters objected to the proposed repeal of paragraph (d) of Rule 12g3-2 that exempts from Section 12(g) registration the securities of a non-Canadian issuer with any class of securities registered under Section 12(b) or any issuer filing reports under Section 15(d). The major consequences of repealing paragraph (d) is to require some of the 83 foreign issuers now subject to a Section 15(d) reporting obligation to register under Section 12(g) and thereby making their securities subject to the Williams Act.¹⁰ The commentators to the proposal pointed out potential problems due to inconsistent tender offer regulation among various countries.

The Williams Act has applied to Canadian and, since 1979, to other foreign equity securities registered under Section 12(b). Approximately 52 Canadian and 65 non-Canadian issuers have securities registered under this section. The proposal would merely end the anomaly of exempting foreign issuers now subject to reporting obligations because of the exchange listing of debt securities or because they have had a registration statement become effective under the Securities Act. Few problems have arisen due to the inconsistent regulations of various countries, but the Commission is aware of the possibility of such problems. As in the past, with respect to foreign securities subject to the Williams Act, such situations will continue to be resolved on a case-by-case basis.

Another consequence of the repeal of paragraph (d) and the consequent registration of securities under Section 12(g) is that certain Canadian issuers would become subject to the proxy requirements of Sections 14(a) and 14(c) of the Exchange Act and the rules thereunder and the short-swing profits provisions of Section 16 of the Exchange Act and the rules thereunder. One commentator stated that the proposal would make Securities Act registration of equity securities more burdensome, extend U.S. regulation to the internal corporate affairs of Canadian issuers, and conflict with the voluntarism principle explained in the proposing release.

More than 50 Canadian issuers are currently subject to such regulations and the repeal of paragraph (d) requires some of the 23 Canadian issuers subject to Section 15(d) to register their securities under Section 12(g). Few problems have arisen in the past under these rules. The Commission believes it is anomalous to exempt those Canadians that have made a registered public offering in the U.S., who would otherwise be subject to Section 12, but not those whose securities are listed on a U.S. exchange or are registered under Section 12 of the Exchange Act.

Foreign issuers that generally are owned and managed by U.S. persons are considered to be essentially U.S. issuers and are ineligible for any of the exemptions or forms available to other issuers organized under foreign law. As amended. Rule 405 and Rule 3b-4 set forth two elements to determine whether an issuer is an essentially U.S. issuer.¹¹ The first element is that fifty percent of the issuer's shares are held by U.S. residents. The second element is that one of three conditions is present: (1) The issuer's business be principally administered in the U.S.; (2) a majority of the issuer's directors or executive officers be U.S. persons; or (3) fifty percent of the assets of the. issuer be located in the U.S. These elements combined concepts in the former and proposed definitions. The Commission believes these amendments will prevent evasion but are unlikely to apply to many issuers not intended to be covered by the concept.

Regulatory Flexibility Act

A copy of the Final Regulatory Flexibility Analysis is available upon . request from the Office of International Corporate Finance, Room 3094 (3-6), Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, D.C., 20549, telephone (202) 272-3246.

List of Subjects in 17 CFR Parts 230 and 240

Reporting and recordkeeping requirements, Securities.

Text of Amendments

17 CFR Chapter II is amended as follows:

PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

§ 230.405 Definitions of terms.

* * * * *

Foreign private isuer: The term "foreign private issuer" means any foreign issuer other than a foreign government except an issuer meeting the following conditions: (1) More than 50 percent of the outstanding voting securities of such issuer are held of record either directly or through voting trust certificates or depositary receipts by residents of the United States; and (2) any of the following: (i) The majority of the executive officers or directors are United States citizens or residents, (ii) more than 50 percent of the assets of the issuer are located in the United States, or (iii) the business of the issuer is administered principally in the United States. For the purpose of this paragraph, the term "resident," as applied to security holders, shall mean any person whose address appears on the records of the issuer, the voting trustee, or the depositary as being located in the United States.

PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

§ 240.3b-4 Definition of "foreign government," "foreign Issuer," and "foreign private issuer."

* * * * *

§ 240.12g-1 Exemption from section 12(g).

An issuer shall be exempt from the requirement to register any class of equity securities pursuant to section 12(g)(1) if on the last day of its most recent fiscal year the issuer had total assets not exceeding-$3,000,000 and, with respect to a foreign private issuer, such securities were not quoted in an automated inter-dealer quotation system.

§ 240.12g-3 to read as follows:

§ 240.12g-3 Registration of securities of successor Issuers.

§ 240.12g3-2 Exemptions for American depository receipts end certain foreign securities.

§ 240.15d-5 Reporting by successor issuers.

* * * * *

Statutory Basis

These amendments are adopted pursuant to authority in Sections 6, 7, 8. 10, and 19(a) of the Securities Act of 1933; Sections 12, 13, 15(d), and 23(a) of the Securities Exchange Act of 1934.

(Secs. 6, 7, 8, 10, 19(a), 48 Stat. 78, 79, 81, 85; secs. 205, 209, 48 Stat. 906, 908; sec. 301, 54 Stat. 857; sec. 8, 68 Stat. 685; sec. 1, 79 Stat. 1051; sec. 308(a)(2), 90 Stat. 57,; secs. 12, 13, 15(d), 23(a), 48 Stat. 892, 894, 895, 901; secs. 1, 3, 8, 49 Stat. 1375, 1377, 1379; sec. 203(a), 49 Stat. 704; sec. 202, 68 Stat. 686; secs. 3, 4, 6, 78 Stat. 565-574; 9ecs. 1,2, 82 Stat. 454; sec. 28(c), 84 Stat. 1435; secs. 1, 2, 84 Stat. 1497; sec. 105(b), 88 Stat. 1503; secs. 8, 9, 10, 18, 89 Stat. 117, 118, 119, 155; sec. 308(b), 90 Stat. 57; secs. 202, 203, 204, 91 Stat. 1494, 1498, 1500; 15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 78l, 78m, 78o(d), 78w(a))

By the Commission.

George A. Fftzsimmons,
Secretary.

October 6, 1983.

[FR Doc. 83-27934 Filed 10-13-83:8:45 am]

BILLING CODE 8010-01-M

¹ Paragraph (b) of that rule exempts certain foreign securities from registration under section 12(g) of the Exchange Act if the issuer furnishes the Commission with copies of disclosure documents made public under foreign law or regulations. Release No. 33-6433 (October 28, 1982) [47 FR 50292] discusses this rule in more detail.

² As explained below, the the securities of issuers listed in accompanying Release No. 34-20265. and currently quoted in NASDAQ are generally grandfathered.

³ Copies of these comment letters a well as a comment highlight prepared by the staff are in File No. S7-951 and are available for public inspection and copying at the Commission's Public Reference Room.

⁴ The monthly average share volume on NASDAQ for the first six months of 1983 was approximately three-fourths that of the New York Stock Exchange and nearly seven times larger than the volume of the American Stock Exchange.

⁵ As explained in the proposing release, foreign securities may be included in NASDAQ directly or in ADR form. These amendments apply equally to both.

⁶ Grandfathering is unusual in the securities laws, but see Section 3(a)(1) of the Securities Act and Section 12(f) of the Exchange Act.

⁷ Unless, of course, the securities are delisted from NASDAQ or the issuer fails to maintain the information-supplying exemption.

⁸ The Commission wishes to remind issuers and broker-dealers of their responsibilities during distributions of unregistered securities. See Release Nos. 33-4445 (February 2, 1962) [27 FR 2312] and 33-5168 (July 17, 1971).

⁹ In 1980, the Commission solicited public comment on whether to eliminate the distinction between Canadian and other foreign private issuers. Few comments, even those from Canadian issuers, supported elimination. Release No. 33-6235 (September 2, 1980) [45 FR 63693].

¹⁰ Sections 13(d), 13(e), 14(d), 14(e) and 14(f) of the Exchange Act regulate certain acquisitions of securities and tender offers.

¹¹ The conditions are in the except clause in the definition of a foreign private issuer. Rules 405 (17 CFR 230.405) and 3b-4 (17 CFR 240.3b-4).