The Securities and Exchange Commission recently issued a concept release on foreign private issuer eligibility.

Qualifying foreign companies listing in the US (termed “foreign private issuers”) receive various exemptions from the rules applying to domestic US companies, including the ability to file their statements in compliance with IFRS rather than with US GAAP. The concept release assesses the current qualifying criteria and the appropriateness of the resulting accommodations, among other things. As SEC Chair Paul Atkins put it in a recent address:

• The concept release is not a signal that the SEC intends to disincentivize such firms from listing on U.S. exchanges. Rather, our goal is to better understand the impact on U.S. investors and the U.S. market resulting from significant changes to the population of foreign companies listed in the United States over the last two decades. Among the notable changes are the makeup of foreign companies reporting to the SEC and the trend of incorporating in a jurisdiction, such as the Cayman Islands, that differs from where the company is headquartered, operates, and is subject to a governance framework that implicates shareholder interests. 

As we covered here, Atkins used the same speech to take shots at the ISSB, suggesting that its very existence diverts the IFRS Foundation’s focus from its core responsibility of funding the IASB, and commenting that “the IASB must promote high-quality accounting standards that are focused solely on driving reliable financial reporting and are not used as a backdoor to achieve political or social agendas.” He suggested that depending on how that evolves, “one of the underlying premises for the SEC’s elimination of the reconciliation requirement for foreign companies…may no longer be valid, and we may need to engage in a retrospective review of that decision.”

Many commenters on the concept release took a general “if it ain’t broke don’t fix it” approach. This is from EY’s comment letter:

• At this stage, we would support (1) allowing issuers subject to meaningful non-US regulation and oversight to retain FPI status, (2) defining FPI status in a way that avoids unnecessary complexity and volatility, and (3) preserving continuity in the accounting standards used by current FPIs to prepare financial statements.
• We believe it is important to highlight the significant costs and efforts that could result from an FPI transitioning to domestic issuer status, including (1) converting from IFRS Accounting Standards as issued by the International Accounting Standards Board to US GAAP for SEC reporting purposes, (2) complying with additional quarterly reporting obligations, such as preparing financial statements reviewed by independent auditors, and (3) meeting certain significant Form 8-K reporting requirements, including providing financial statements for acquired businesses…and related pro forma financial information.

Likewise, from Deloitte:

• We note that some of the definitional changes raised in the concept release…could result in a significant population of current FPIs that are dual-listed and subject to home-country regulation no longer qualifying for FPI status. This could affect companies that are currently required by their home country to prepare their financial statements under IFRS, or those whose eligibility for other accommodations is dependent on meeting the definition of FPI…
• A requirement to prepare financial statements pursuant to US GAAP due to a change in their FPI status could be challenging to these companies, both because they are subject to existing IFRS reporting requirements in their home country and because there may be limited US GAAP expertise in their jurisdiction. More broadly, a change of definition could result in a significant number of companies transitioning to US GAAP in the same year, which could strain the resources of not only individual companies, but also others in the reporting ecosystem, including legal and financial reporting advisors, independent auditors, as well as the SEC staff who will need to address transition issues that may arise.

Deloitte and others also raised an important technical point:

• We also encourage the Commission, if it ultimately changes the definition of FPI, to consider the need for specific guidance about the transition from IFRS to US GAAP. For example, unlike IFRS 1–First-time Adoption of International Financial Reporting Standards, US GAAP does not include a requirement for, or guidance on, the preparation of an opening balance sheet or reconciliations from previously reported amounts. However, registrants may need to provide transitional information to their investors during the period leading up to and including when they first issue US GAAP financial statements. As such, the Commission may wish to consider providing guidance to registrants regarding the disclosure of any opening balance sheet under US GAAP, reconciliations, or other transition disclosures that registrants may wish to, or (if the Commission so determines) are required to provide.

Clearly, it’s valid in this area as in all others for the SEC to review the ongoing effectiveness of its rules from time to time, especially where the prevailing environment has evolved significantly, and maybe major changes will ultimately prove appropriate notwithstanding the logistical consequences set out above. It’s unfortunate though that Atkins’ comments tend to make the project sound more like an exercise in isolationist petulance…

The opinions expressed are solely those of the author.