Worldwide: Governance & Securities Law Focus: Asia Edition, April 2016


SEC and NYSE/Nasdaq Developments New NYSE Rule on Reporting Semi-Annual Financials for Foreign Private Issuers

On 19 February 2016, the US Securities and Exchange Commission ("SEC") approved a New York Stock Exchange ("NYSE") rule change to require foreign private issuers to file semi-annual financial statements on Form 6-K. This rule change is intended to align financial reporting practices of NYSE-listed foreign private issuers with NYSE-listed domestic issuers.

Prior to the change, foreign private issuers were not subject to any SEC rule that specifically requires the filing of interim financial information. However, as a matter of practice or home-country requirements, most foreign private issuers do already comply with semi-annual financial reporting.

The new Section 203.03 of the NYSE Listed Company Manual provides that each listed foreign private issuer must, at a minimum, submit to the SEC a Form 6-K that includes: (i) an interim balance sheet as of the end of its second fiscal quarter; and (ii) a semi-annual income statement that covers its first two fiscal quarters. These must be submitted no later than six months following the end of the company's second fiscal quarter. The new rules have been effective retroactively from 5 February 2016, and apply to companies with a fiscal year starting on or after 1 July 2015.

Nasdaq Proposes New Rule Requiring Disclosure of Third Party Compensation to Directors and Candidates

On 28 January 2016, Nasdaq filed an initial proposal with the SEC to mandate disclosure by listed companies where third parties (usually corporate activist shareholders) make payments to directors and director nominees. The proposed changes in Rule 5250 are intended to improve transparency to investors, shareholders and the public on directors and director nominees incentives.

In recent years, activist shareholders have tried to use monetary incentives to induce directors to push for at least short- term returns for the company, or to induce individuals to act as director nominees in a proxy contest. Such arrangements have raised concerns of conflicts of directors' fiduciary duty to the company and the promotion of certain shareholders' narrow interests.

The new rules will require listed companies: (i) to make reasonable enquiries as to such third-party compensation arrangements; and (ii) to promptly disclose all the salient terms of these arrangements and the names of the parties on the company website and proxy statement filings. The proposed rules are intended to be broadly interpreted, with the exception of payments made to director nominees as reimbursement of expenses and payments which existed before the nominee's candidacy and that are already publicly disclosed elsewhere (such as compensation relating to a pre-existing employment relationship but not in contemplation of the director candidacy).

If approved by the SEC, the new rules will take effect beginning on 30 June 2016. In order to meet the requirements, companies should revisit their director questionnaires and corporate governance policies on directors' disclosure of interests.

US House Of Representatives Passes Bill That Would Expand "Accredited Investor" Definition

On 1 February 2016, the House of Representatives passed HR 2187 "Fair Investment Opportunities for Professional Experts Act," which, if signed into law, would expand the definition of "accredited investor" under the US securities laws.

The bill would amend Section 2(a)(15) of the Securities Act of 1933 (the "Securities Act") to include within the definition of "accredited investor": (i) persons in the securities industry licensed by the SEC or the Financial Industry Regulatory Authority ("FINRA") (such as a registered broker or investment adviser), or persons licensed with the securities division of a state or an equivalent state division; and (ii) persons whom the SEC determines by regulation to have demonstrable education or job experience to qualify such persons as having professional knowledge of a subject related to a particular investment, and whose education or job experience is verified by FINRA or an equivalent self- regulatory authority.

The bill also seeks to codify in the definition of "accredited investor" in Section 2(a)(15) of the Securities Act the income and net worth thresholds currently specified in Regulation D and directs the SEC to adjust those financial thresholds for inflation every five years. The bill would need to be passed by the Senate and signed into law by the President before taking effect.

SEC Expresses Concerns Over Aggressive Adjustments to Earnings

Currently, companies are generally permitted to use profit figures that reflect adjustments to profit measures calculated and presented in accordance with US generally accepted accounting principles ("GAAP") or IFRS, so long as—if such non-GAAP measures are disclosed in SEC filings—they are not misleading and are not given greater prominence than the comparable GAAP measures and a reconciliation is provided to the most directly comparable GAAP (or IFRS) measure. For members of the Dow Jones Industrial Average that reported non GAAP earnings per share in 2015, the adjusted metric was on average 30% above earnings per share under GAAP, according to data from FactSet.

The SEC has recently questioned such aggressive financial reporting practices in comment letters to a number of SEC reporting companies, which have agreed to scale back their use of adjusted measures.

In a recent conference held by the US Chamber of Commerce, SEC Chairman Mary Jo White expressed concern on the use by companies of non-GAAP results, and in particular, reporting aggressive adjustments to earnings. This could result in new rules restricting such non-GAAP metrics.

While the SEC recognises the value of non-GAAP disclosures, such new rules could at a minimum target current loopholes that allow companies to give more prominence to non-GAAP figures on platforms and media not covered by SEC rules, such as websites and press releases. It is unclear if or when any such new rules would be introduced.

SEC Financial Reporting Manual Update

On 17 March 2015, the SEC's Division of Corporation Finance revised its Financial Reporting Manual in three main aspects:

  • First, the revised version includes updated guidance on testing significance of equity method investments.
  • Second, topic 10 on "Emerging Growth Companies" ("EGCs") has been updated to reflect the requirements of the Fixing America's Surface Transportation Act (the "FAST Act"), including paragraphs on: (i) an EGC's ongoing treatment as an EGC even if such status is lost during the review of its registration statement; and (ii) financial reporting accommodations regarding (a) the omission of financial information for historical periods, (b) the number of periods covered in Management's Discussion and Analysis and (c) the permitted omission of financial statements required by either Rule 3-05 or Rule 3-09 of Regulation S-X if the issuer reasonably believes those financial statements will not be required at the time of the offering.
  • Third, topic 11 on "Reporting Issues Related to Adoption of New Revenue Recognition Standard" has been revised to include a summary of the implementation guidance in Accounting Standards Update No. 2014-09 on Revenue from Contracts with Customers, as amended by Accounting Standards Update No. 2015-14, and IFRS 15 Revenue from Contracts with Customers. The revisions also add a Q&A section addressing the effects of implementation on (i) selected financial data, (ii) supplementary quarterly financial data for an EGC, (iii) the ratio of earnings to fixed charges and (iv) financial statements of other entities and significance.

The revised Financial Reporting Manual is available at:

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