As I recently blogged, the defense spending bill that has now been passed by both the House and the Senate includes a provision – the “Holding Foreign Insiders Accountable Act” – that President Trump signed into law last Thursday. This new law requires the SEC to change Rule 3a12-13(b) under the Exchange Act – under which FPIs have been exempt from the requirements of Section 16 – so that FPIs are subject to Section 16(a) reporting.
With a hat tip to Cooley’s Darren DeStefano, Reid Hooper, Katie Kazem, and Courtney Thorne, here are five things to know:
- FPIs subject to Section 16 reporting by as early as March 18th – The new law becomes effective by mandating that the SEC act to implement it within 90 days after the law is enacted. The President signed the bill into law on December 18th, which means that this FPI reporting requirement is required to become effective by March 18th.
- Directors and officers of FPIs required to file Section 16 reports; likely not 10% holders – The new law doesn’t extend the Section 16(a) filing requirements to beneficial owners of 10% of an FPI, as is required for 10% shareholders of US companies. However, the SEC could elect to expand the coverage of these filing requirements through rulemaking. Importantly, institutional investors with affiliated individuals serving as company directors and are considered “directors by deputization” for Section 16 purposes will be subject to Section 16(a) filing requirements to the same extent as individual directors.
- Short-swing profit liability doesn’t apply to FPI insiders – Under this new law, Section 16(b) doesn’t apply to insiders of FPIs like it does to insiders of US companies. However, it is possible that, through rulemaking, the SEC could extend the short-swing profit liability provisions of Section 16(b) to FPIs as well.
- The SEC may grant exemptive relief for FPIs that list in a foreign jurisdiction that imposes “substantially similar requirements” to Section 16(a) – The new law gives the SEC the authority to grant exemptive relief for dual-listed companies that also list in jurisdictions that have a similar regime to Section 16. We don’t know if the SEC will exercise this authority to grant exemptive relief but there are some jurisdictions with a similar regime including Europe, the United Kingdom and Canada.
- FPIs subject to the new law need to act fast – There isn’t a lot of time to implement a Section 16 compliance program including identifying who is a Section 16 officer, educating insiders and obtaining the necessary EDGAR access codes
Authored by
Broc Romanek