September 22, 2023

Foreign Private Issuers: Section 16 Exemption on the Way Out?

Earlier this week on his blog, Alan Dye pointed out that the Senate recently passed legislation that would create a lot of headaches for foreign private issuers:

The Senate-passed National Defense Authorization Act for Fiscal Year 2024 contains a provision (Section 6081) that would amend Section 16(a)(1) of the Exchange Act to subject insiders of foreign private issuers to Section 16 and render null and void any SEC rule exempting them from Section 16. If enacted, the amendment would partially nullify Rule 3a12-3, which provides that securities of FPIs are not subject to Section 16 and parts of Section 14. I don’t know who is behind the amendment, but I will try to find out.

Weil’s Howard Dicker subsequently provided us with the information that Alan was looking for. It turns out that a stand-alone bill removing the Section 16 exemption for FPIs was introduced in the Senate back in April 2023. That legislation was co-sponsored by Sen. John Kennedy (R-LA) and Sen. Chris Van Hollen (D-MD), both of whom co-sponsored an identically worded bill the prior year.  Then, in July 2023, those co-sponsors offered the same text as an amendment to the National Defense Authorization Act.

When they introduced the stand-alone bill, the co-sponsors issued a press release describing their reasons for the proposed legislation. Here’s an excerpt:

“Insiders at companies in Beijing and Moscow have been able to avoid billions in losses on the U.S. stock exchange by playing by a different set of rules than Americans do. This insider trading comes at a cost to American investors. The Holding Foreign Insiders Accountable Act will help stop opportunistic insider trading by requiring foreign executives to disclose trades immediately,” said Kennedy.

“All companies operating on U.S. markets should have to play by the same rules. And when corporate insiders sell their stocks, investors and the American public have a right to know. It’s time to require foreign executives to disclose these trades and provide this information to the public,” said Van Hollen.

I appreciate the rationale behind the proposed amendment, and the co-sponsors’ commentary on the bill suggests that their focus is on Section 16(a) reporting.  But as written, it looks like the amendment would also subject FPI insiders to the short-swing profit recovery provisions of Section 16(b) – and that’s something I think legislators ought to think long and hard about before they enshrine it into law.

It’s one thing to require companies that want to enjoy the privilege of a US listing to be required to publicly disclose insider trades on a timely basis, but it’s another to expose foreign company insiders to potential liability under a draconian statutory relic that’s a notorious trap for the unwary. Subjecting FPI insiders to Section 16(b) will create a pretty strong disincentive for the folks who call the shots at foreign companies to list their shares here. And we do still want them to do that, right?

John Jenkins