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© 2012 Morrison & Foerster LLP All Rights Reserved | mofo.com How Foreign Banks Can Finance in the United States NY2 713434 January 10, 2013.

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Presentation on theme: "© 2012 Morrison & Foerster LLP All Rights Reserved | mofo.com How Foreign Banks Can Finance in the United States NY2 713434 January 10, 2013."— Presentation transcript:

1 © 2012 Morrison & Foerster LLP All Rights Reserved | mofo.com How Foreign Banks Can Finance in the United States NY January 10, 2013

2 This is MoFo. | 2 Topics for Presentation Rule 144A offerings Section 3(a)(2) offerings Covered bond offerings Registration process for registered offerings Confidential submissions and the registration process (including Industry Guide 3 disclosures in registration statements) Benefits available to foreign private issuers (FPIs) Accounting considerations Corporate governance considerations Ongoing reporting obligations Specialized disclosure requirements

3 This is MoFo. | 3 Foreign Bank Debt Financing Activities Types of bank debt issuances Senior unsecured debt Senior secured debt (including covered bonds) Subordinated debt Structured debt (e.g., equity-linked and commodity-linked notes) Hybrid debt / preferred stock Contingent capital (coco) debt Deposit liabilities Issuing entities Home offices US branches Other affiliated entities (e.g., financing SPVs) Issuance formats Private placements (pursuant to Section 4(a)(2) of the Securities Act). Rule 144A offerings Section 3(a)(2) offerings SEC-registered offerings

4 This is MoFo. | 4 Rule 144A Offerings

5 This is MoFo. | 5 Why Are Rule 144A Offerings Attractive to Non- U.S. Banks? Rule 144A provides a clear safe harbor for offerings to institutional investors. Does not require extensive ongoing registration or disclosure requirements. Index eligible issuances have good liquidity in the Rule 144A market.

6 This is MoFo. | 6 Rule 144A provides a non-exclusive safe harbor from the registration requirements of Section 5 of the Securities Act for resales of restricted securities to qualified institutional buyers (QIBs). The rule recognizes that not all investors are in need of the protections of the prospectus requirements of the Securities Act. The rule applies to offers made by persons other than the issuer of the securities. (i.e., resales). The rule applies to securities that are not listed on a U.S. securities exchange or quoted on an automated inter-dealer quotation system. A reseller may rely on any applicable exemption from the registration requirements of the Securities Act in connection with the resale of restricted securities (such as Regulation S or Rule 144). Rule 144A – Overview

7 This is MoFo. | 7 Types of Rule 144A Offerings Rule 144A offering for an issuer that is not registered in the U.S. – usually a standalone Rule 144A continuous offering program Used for repeat offerings, often by financial institution and insurance company issuers, to institutional investors. Often used for structured products and for covered bonds sold to QIBs.

8 This is MoFo. | 8 How Are Rule 144A Offerings Structured? The issuer initially sells restricted securities to investment bank(s) as initial purchasers in a Section 4(a)(2) or Regulation D private placement. The investment bank reoffers and immediately resells the securities to QIBs under Rule 144A. Often combined with a Regulation S offering.

9 This is MoFo. | 9 Rule 144A Offering Memorandum May contain similar information to a full S-1/F-1 prospectus, or may be much shorter. If the issuer is a public company, it may incorporate by reference the issuers filings from its home country. Scope of disclosure (whether included or incorporated by reference) may be comparable to a public offering, as the initial purchasers/underwriters expect 10b-5 representations from the issuer, and legal opinions from counsel. Due diligence by counsel will often be similar to that performed in a public offering. For a non-U.S. offering, with a Rule 144A tranche, there may be a U.S. Rule 144A wrapper attached to the non-U.S. offering document.

10 This is MoFo. | 10 Additional Documentation for a Rule 144A Offering A purchase agreement between the issuer and the initial purchasers/underwriter(s) Similar to an underwriting agreement in terms of representations, covenants, closing conditions and indemnities. Legal opinions 10b-5 negative assurance letters Comfort letters

11 This is MoFo. | 11 How Are Rule 144A Offerings Conducted? Often similar to a registered offering. Road show with a preliminary offering memorandum. Confirmation of orders with the final offering memorandum. The offering memorandum may be delivered electronically. The purchase agreement is executed at pricing, together with the delivery of a comfort letter. Closing on a T+3 basis, or as otherwise agreed with the investors. Publicity: generally limited to a Rule 135c compliant press release – limited information about the offering.

12 This is MoFo. | 12 The JOBS Act and Marketing Rule 144A Offerings The JOBS Act requires the SEC to adopt rules to permit general solicitations in connection with Rule 144A offerings, provided that sales are made solely to QIBs. The SEC issued proposed rules on August 29, 2012 and the comment period ended on October 5, The SEC has not issued final rules at this time. Potential impact: Use of additional offering modalities to market transactions and disseminate information. For example, public websites that describe the offering and press releases.

13 This is MoFo. | 13 Conditions for Rule 144A Offering Reoffers or resales only to a QIB, or to an offeree or purchaser that the reseller reasonably believes is a QIB. Reseller must take steps to ensure that the buyer is aware that the reseller may rely on Rule 144A in connection with such resale. The securities reoffered or resold (a) when issued were not of the same class as securities listed on a U.S. national securities exchange or quoted on a U.S. automated inter-dealer quotation system and (b) are not securities of an open-end investment company, UIT, etc. For an issuer that is not an Exchange Act reporting company or exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, the holder and a prospective buyer designated by the holder must have the right to obtain from the issuer, upon the holders request, certain reasonably current information.

14 This is MoFo. | 14 Rule 159: Time of Sale Information Although Rule 159 under the Securities Act is not expressly applicable to Rule 144A offerings, many investment banks apply the same treatment, in order to help reduce the risk of liability. Use of term sheets and offering memoranda supplements, to ensure that all material information is conveyed to investors at the time of pricing. Counsel is typically expected to opine as to the disclosure package, as in the case of a public offering. NY

15 This is MoFo. | 15 Section 3(a)(2) Offerings

16 This is MoFo. | 16 Section 3(a)(2) and Offerings by Banks Section 3(a)(2) of the Securities Act exempts from registration under the Securities Act any security issued or guaranteed by a bank. Basis: banks are highly regulated, and provide adequate disclosure to investors about their finances in the absence of federal securities registration requirements. Banks are also subject to various capital requirements that may increase the likelihood that holders of their debt securities will receive timely payments of principal and interest.

17 This is MoFo. | 17 What Is a Bank? Under Section 3(a)(2), the institution must meet both of the following requirements: it must be a national bank or any institution supervised by a state banking commission or similar authority; and its business must be substantially confined to banking. Examples of entities that do not qualify: Bank holding companies Finance companies Investment banks Foreign banks

18 This is MoFo. | 18 Guarantees Another basis for qualification as a bank: securities guaranteed by a bank. Not limited to a guaranty in a legal sense, but also includes arrangements in which the bank agrees to ensure the payment of a security. The guaranty or assurance of payment, however has to cover the entire obligation; it cannot be a partial guarantee or promise of payment. Again, guarantees by foreign banks (other than those of an eligible U.S. branch or agency) would not qualify for this exception. The guarantee is a legal requirement to qualify for the exemption; investors will not be looking to the US branch for payment/credit. Investors will look to the home office.

19 This is MoFo. | 19 Non-U.S. Banks/U.S. Offices U.S. branches/agencies of foreign banks are conditionally entitled to rely on the Section 3(a)(2) exemption. 1986: the SEC takes the position that a foreign branch/agency will be deemed to be a national bank or a banking institution organized under the laws of any state if the nature and extent of federal and/or state regulation and supervision of that particular branch or agency is substantially equivalent to that applicable to federal or state chartered domestic banks doing business in the same jurisdiction. As a result, U.S. branches/agencies of foreign banks are frequent issuers or guarantors of debt securities in the U.S. Most issuances or guarantees occur through the NY branches of these banks.

20 This is MoFo. | 20 FINRA Requirements Even though securities offerings under Section 3(a)(2) are exempt from registration under the Securities Act, public securities offerings conducted by banks must be filed with the Financial Industry Regulatory Authority (FINRA) for review under Rule 5110(b)(9), unless an exemption is available. Transactions under Section 3(a)(2) must also be reported through FINRAs Trade Reporting and Compliance Engine (TRACE). TRACE eligibility provides greater transparency for investors. Currently, Rule 144A securities are not TRACE reported.

21 This is MoFo. | 21 OCC Registration/Disclosure National banks or federally licensed U.S. branches/agencies of foreign banks regulated by the Office of the Comptroller of the Currency (the OCC) are subject to OCC securities offering (Part 16) regulations. Part 16 of OCC regulations provides that these banks or banking offices may not offer and sell their securities until a registration statement has been filed and declared effective with the OCC, unless an exemption applies. An OCC registration statement is generally comparable in scope and detail to an SEC registration statement; as a result, most bank issuers prefer to rely upon an exemption from the OCCs registration requirements. Section 16.5 provides a list of exemptions, which includes: Regulation D offerings Rule 144A offerings

22 This is MoFo. | 22 Part 16.6 of the OCC Regulations 12 CFR 16.6 provides a separate partial exemption for offerings of non-convertible debt to accredited investors in denominations of $250,000 or more. National banks with foreign parents that have shares traded in the US may be able to rely upon this exemption by furnishing the foreign private issuer reports (Forms 20-F, 6-K) filed by foreign issuers. Alternatively, Federal branches/agencies may rely on this exemption by furnishing to the OCC parent bank information which is required under Exchange Act Rule 12g3-2(b), and to purchasers the information required under Securities Act Rule 144A(d)(4)(i).

23 This is MoFo. | 23 Denominations The 3(a)(2) exemption does not require specific minimum denominations in order to obtain the exemption. However, for a variety of reasons, denominations may at times be significantly higher than in retail transactions: Offerings targeted to institutional investors. Complex securities. Relationship to 16.6s requirement of $250,000 minimum denominations.

24 This is MoFo. | 24 Deposits Versus Other Liabilities Foreign banks may elect to issue debt instruments in the form of deposit liabilities as opposed to pure debt: Yankee CDs (US$-denominated deposit liabilities of a foreign bank or its US branch). Other types of deposits (e.g., structured deposits). What are the legal differences between deposit liabilities and other debt issuances? In the case of foreign banks, less than meets the eye. Foreign banking organization (FBO) deposit liabilities are not insured and generally are issued in large denominations (minimum $100,000 and usually higher). For capital equivalency/asset segregation purposes, deposits and non-deposit liabilities generally are treated in the same manner.

25 This is MoFo. | 25 Blue Sky Regulation Securities issued under Section 3(a)(2) are considered covered securities under Section 18 of the Securities Act. As a result, blue sky filings are not needed in any state in which the securities are offered.

26 This is MoFo. | 26 Exchange Act Reporting Section 12(i) of the Exchange Act provides that the administration and enforcement of Exchange Act Sections 12, 13, 14(a), 14(c), 14(d), 14(f), and 16 is vested in the OCC with respect to national banks, the Federal Reserve Board as to member banks of the Federal Reserve System, the FDIC as to all other insured banks, and the OTS as to savings associations. As a result, a bank that otherwise would be subject to Exchange Act periodic reporting requirements would submit its reports to the appropriate banking agency, and not to the SEC.

27 This is MoFo. | 27 Exchange Act Reporting (contd) Foreign banks are not Section 3(a)(2) banks and therefore are not subject to Exchange Act Section 12(i), but to the extent they otherwise are required to register under the Exchange Act as issuers, or submit reports as foreign private issuers, they would register and file their reports with the SEC. U.S. branches/agencies of foreign banks would not be subject to Exchange Act Section 12(i) requirements solely by virtue of their issuance of debt securities.

28 This is MoFo. | 28 Securities Liability Securities offerings of, or guaranteed by, a bank under Section 3(a)(2) are not subject to the civil liability provisions under Section 11 and Section 12(a)(2) of the Securities Act. However, the anti-fraud provisions of Section 17 of the Securities Act are applicable to offerings under Section 3(a)(2). Additionally, offerings under Section 3(a)(2) are also subject to Section 10(b) of the Exchange Act and the anti-fraud provisions of Rule 10b-5 of the Exchange Act. Impact on offering documents, and use of offering circulars to convey material information and risk factors.

29 This is MoFo. | 29 Section 3(a)(2) Offering Documentation The offering documentation for bank notes is similar to that of a registered offering. Base offering document, which may be an offering memorandum or an offering circular (instead of a prospectus). The base document is supplemented for a particular offering by one or more pricing supplements and/or product supplements. These offering documents may be supplemented by additional offering materials, including term sheets and brochures.

30 This is MoFo. | 30 Comparison of Section 3(a)(2) to Rule 144A Section 3(a)(2)Rule 144A Required issuer:Need a US state or federal licensed bank as issuer or as guarantor No specific issuer or guarantor is required Exemption from the Securities Act: Section 3(a)(2)Section 4(a)(2) / Rule 144A FINRA Filing Requirement: Subject to filing requirement and payment of filing feeNot subject to FINRA filing Blue Sky:Generally exempt from blue sky regulation Listing on an exchange: May be listed if issued in compliance with Part 16.6No RestrictedNo; considered public and therefore eligible for bond indices, TRACE reporting Yes

31 This is MoFo. | 31 Comparison of Section 3(a)(2) to Rule 144A (contd) Section 3(a)(2)Rule 144A Required governmental approvals: Banks licensed by the OCC are subject to the Part 16.6 limitations, unless an exemption is available. Generally none. Permitted Offerees:All investors, which means that there is a broader market. However, banks licensed by the OCC are subject to the Part 16.6 limitations, unless an exemption is available. Generally, sales to accredited investors. Only to QIBs. No retail. Minimum denominations: All denominations. However, banks licensed by the OCC are subject to minimum denomination requirement. No minimum denominations requirement. Role of Manager/Underwriter: Either agented or principal basis.Must purchase as principal. 40 Act:Banks not considered investment companies. Foreign banks will want to review 40 Act guidance. Non-bank issuer should consider whether there is a 40 Act issue. Settlement:Through DTC, Euroclear/Clearstream.Through DTC, Euroclear/Clearstream

32 This is MoFo. | 32 Note: Shading denotes Yankee issuance; list is comprehensive but may not capture every 3(a)(2) issuance in ; 3(a)(2) issuances are unsecured 3(a)(2) Issuances ( ) Pricing DateIssuerRatings (M/S)Coupon (%)Tranche Value (US$mm)StructureMaturity DateDeal Nationality 1/7/ /8/2012 Intesa SanPaolo Spa (New York) American Express Centurion Bank Baa2/BBB+ A2/A ,000 1, YR FXD 5YR FXD 3YR FXD 1/15/2016 1/16/ /13/2015 Italy US 11/8/2012American Express Centurion BankA2/A-3mL+45bp5503YR FRN11/13/2015US 11/2/2012Rabobank NederlandAa2/AA ,50010YR FXD11/9/2022Netherlands 11/2/2012National Bank of CanadaAa2/A YR FXD11/7/2017Canada 10/17/2012PNC Bank NAA3/A ,00010YR FXD11/1/2022US 9/4/2012Australia & New Zealand Banking Group (New York)Aa2/AA YR FXD10/6/2017Australia 8/10/2012UBS AG (Stamford)-/BBB ,00010YR FXD8/17/20222Switzerland 8/8/2012National Australia Bank LtdAa2/AA YR FXD8/10/2017Australia 7/26/2012National Australia Bank (New York)Aa2/AA-3mL+113bp5003YR FRN8/7/2015Australia 7/26/2012National Australia Bank (New York)Aa2/AA ,2503YR FXD8/7/2015Australia 7/10/2012Sumitomo Mitsui Banking CorpAa3/A ,0003YR FXD7/18/2015Japan 7/10/2012Sumitomo Mitsui Banking CorpAa3/A ,2505YR FXD7/18/2017Japan 7/10/2012Sumitomo Mitsui Banking CorpAa3/A YR FXD7/18/2022Japan 6/6/2012TCF National BankBaa1/BBB YR FXD6/8/2022US 3/28/2012Svenska Handelsbanken ABAa3/AA ,2505YR FXD4/4/2017Sweden 3/16/2012National Australia Bank LtdAa2/AA-3mL+1bp1753YR FRN3/20/2015Australia 3/5/2012Commonwealth Bank of Australia (New York)Aa2/AA ,0003YR FXD3/16/2015Australia 3/1/2012National Australia Bank (New York)Aa2/AA ,5003YR FXD3/9/2015Australia 3/1/2012National Australia Bank (New York)Aa2/AA ,0005YR FXD3/9/2017Australia 2/1/2012Rabobank NederlandAa2/AA ,00010YR FXD2/8/2022Netherlands 1/17/2012First Republic BankBaa3/BBB Perpetual US 1/11/2012Rabobank NederlandAa2/AA ,5005YR FXD1/19/2017Netherlands 7/20/2011Rabobank NederlandAa2/AA-3mL+20bp3602YR FRN7/25/2013Netherlands 7/5/2011Svenska Handelsbanken ABAa3/AA ,2505YR FXD7/12/2016Sweden 5/24/2011BNP Paribas SAA2/A YR FXD3/11/2015France 4/20/211BNP Paribas SAA2/A YR FXD3/11/2015France 4/14/2011Rabobank NederlandAa2/AA-3mL+35bp3503YR FRN4/14/2014Netherlands 4/6/2011BNP Paribas (New York)A2/A ,00010YR FXD1/15/2021France 3/22/2011UBS AG (Stamford)A2/A3mL+40bp3002YR FRN9/25/2012Switzerland 2/17/2011BNP Paribas SAA2/A YR FXD3/11/2015France 1/25/2011UBS AG (Stamford)A2/A2.2501,0003YR FXD1/28/2014Switzerland 1/25/2011UBS AG (Stamford)A2/A3mL+100bp7503YR FRN1/28/2014Switzerland 1/12/2011BNP Paribas (New York)A2/A ,00010YR FXD1/15/2021France 1/4/2011Rabobank NederlandAa2/AA ,2503YR FXD1/10/2014Netherlands 1/4/2011Rabobank NederlandAa2/AA ,50010YR FXD1/11/2021Netherlands

33 This is MoFo. | 33 Covered Bond Offerings

34 This is MoFo. | 34 What Are Covered Bonds? Senior debt of a regulated financial entity Secured by a pool of financial assets Mortgage loans – residential and commercial Public sector obligations Ship loans Protected from acceleration in the event of issuer insolvency By statute or legal structure Collateral is isolated from insolvency estate of the issuer Collateral pays bonds as scheduled through maturity A dynamic collateral pool – refreshed every month Typically bullet maturity, fixed rate bonds Repayment liabilities remain on the balance sheet of the originator Most countries have statutes enabling covered bond. Very strong implicit government support in many jurisdictions

35 This is MoFo. | 35 Benefits to Issuing Banks Lower funding cost than senior bank debt Extension of WAM for bank funding Typical maturities for covered bonds of seven years or more. Diversification of funding base Investors typically do not buy RMBS or senior bank debt. Mortgage modifications to accommodate borrower is easy (no competing interests) Brings mortgage finance out of the shadow banking world Levels the playing field Foreign banks currently have access to this investor base, including in the U.S., while U.S. banks do not.

36 This is MoFo. | 36 Covered Bond Investors Covered bond investors buy sovereign and agency debt Some of these same investors buy FNMA, FHLMC, GNMA debt Typically they will not buy senior bank debt They do not buy CMBS or ABS or RMBS To attract these investors you need statutory covered bonds Predominantly banks, central banks, funds and insurance companies A 3 trillion market in Europe The U.S. investor base is opening up (foreign banks issued approximately $50 billion in covered bonds in the U.S. in 2012)

37 This is MoFo. | 37 Benefits to Investors High credit quality – most bonds are triple-A rated In Europe, favorable capital treatment for bank investors Higher yield than sovereign debt Diversification – sovereign or agency debt is viewed as similar risk Good liquidity Issuance regulated by statute in many European jurisdictions More investor friendly than RMBS or CMBS Not an originate-to-sell model No complex tranching – good transparency No negative convexity (prepayment) risk 100% skin in the game

38 This is MoFo. | 38 Foreign Bank Issuances Foreign banks issuing into the U.S. market have been relying on their domestic covered bond framework and have been using cover pool assets that are foreign (not in the U.S.). Issuances into the U.S. have been structured as program issuances (or syndicated takedowns) conducted on an exempt basis, that means that the foreign issuer is relying on exemptions from the U.S. securities laws requiring registration of public offerings of securities. To date, only one issuer (RBC) has registered a covered bond with the SEC. It is expected that other foreign issuers will follow suit. As a result, offerings have been targeted at U.S. institutional investors and generally conducted in reliance on Rule 144A.

39 This is MoFo. 39 Registration Process for Registered Offerings

40 This is MoFo. 40 What Securities to Register? A foreign private issuer (FPI) may offer any type of security that a U.S. domestic issuer is permitted to offer. In addition, an FPI may offer its securities using American Depositary Receipts (ADRs). An FPI registering securities for the first time, will register ordinary shares or ADRs. Once an FPI has ordinary shares or ADRs listed in the U.S., it may register debt securities under another registration statement.

41 This is MoFo. 41 Which Registration Form Should be Used? Typically, an FPI will register ordinary shares on Form F-1. A registration statement on Form F-1 is similar to a Form S-1 filed by U.S. domestic issuers and requires extensive disclosure about the FPIs business and operations. However, Form 20-F may also be filed as a registration statement for ordinary shares when an FPI is not engaged in a public offering of its securities, but is still required to be registered under the Exchange Act. For example, when an FPI reaches the holder of record threshold under Section 12(g) of the Exchange Act, and there is no other exemption available. Unsponsored ADRs must be registered on Form F-6.

42 This is MoFo. 42 Which Registration Form Should be Used? (contd) Certain Canadian issuers may take advantage of the Multi- Jurisdictional Disclosure System (MJDS), which allows a shorter form of disclosure and incorporation by reference to Canadian disclosures. Once an FPI has been subject to the U.S. reporting requirements for at least 12 calendar months, it may use Form F-3 to offer securities publicly in the United States. Form F-3 is a short-form registration statement (analogous to Form S-3 for U.S. domestic issuers) and may be used by an FPI if the FPI meets both the forms registrant requirements and the applicable transaction requirements. Form F-3 permits an FPI to disclose minimal information in the prospectus included in the Form F-3 by incorporating by reference the more extensive disclosures already filed with the SEC under the Exchange Act, primarily in the FPIs most recent Annual Report on Form 20-F and its Forms 6-K.

43 This is MoFo. 43 Industry Guide 3 Provides guidelines for statistical disclosures by foreign banks and bank holding companies in SEC filings. Market practice to also meet guidelines for unregistered offerings. Statistical disclosures can be included in the registration statement itself or incorporated by reference from the FPIs annual report or quarterly/period reports to shareholders. Generally, the data provided must be for each of the last three or five fiscal years, plus any interim period if necessary to keep the information from being misleading. Available at

44 This is MoFo. 44 Industry Guide 3 Guidelines require detailed disclosures regarding a foreign banks: assets, liabilities and equity accounts, interest rates and interest spreads, investment portfolio, loan portfolio, loan maturities, loan sensitivity to changes in interest rates, problem loans, loan concentrations, loan loss experience, other earning assets, deposits and return on equity and assets.

45 This is MoFo. 45 Industry Guide 3 (contd) Disclosure requirements are applicable to the extent the requested information is available. Since an FPI is required to disclose in the registration statement all material information necessary to make what is disclosed not misleading, the disclosures may in certain circumstances go beyond the requirements of Industry Guide 3. However, the SEC has permitted deviations from the guidelines if more meaningful disclosure with respect to a particular issue would be provided as a result. If the required information is unavailable or cannot be gathered without undue burden or expense to the FPI, the situation should be brought to the attention of the SEC in the early stages of the registration process.

46 This is MoFo. 46 SEC Review Process The SECs review of the registration statement is an integral part of the registration process and should be view as a collaborative effort. Once a registration statement is filed, a team of SEC Staff members is assigned to review the filing, which consists of accountants and lawyers, including examiners and supervisors. The SECs principal focus during the review process is to assess the companys compliance with the SECs registration and disclosure rules, although the nature of some comments shade into substantive review. The SEC considers the disclosures in the registration statement through the eyes of an investor in order to determine the type of information that would be considered material to an investor. The SEC Staff will closely review websites, databases and magazine and newspaper articles, looking in particular for information that they think should be included the registration statement or that contradicts information included in the registration statement.

47 This is MoFo. 47 SEC Review Process (contd) The review process is time-consuming. While there was a time when the review process could be completed in roughly two months, now given the length of many prospectuses and the complexity of the companys business and the nature of the issues raised in the review process, it can take three to five months. Initial comments on the registration statement are provided in about 30 days; however, depending on the SECs workload and the complexity of the filing, the receipt of first-round comments may take longer. The SECs initial comment letter typically includes about 50 to 75 comments, with a majority of the comments addressing accounting issues. The company and counsel will prepare a complete and often lengthy response. In some instances, the company may not agree with the SEC Staffs comments, and may choose to schedule calls to discuss the matter with the SEC Staff. The company will file an amendment to the registration statement, and provide the response letter along with any additional information. The SEC Staff generally tries to address response letters and amendments within 10 days, but timing varies considerably.

48 This is MoFo. 48 FPIs

49 This is MoFo. 49 What is a Foreign Private Issuer? An FPI is any issuer (other than a foreign government) incorporated or organized under the laws of a jurisdiction outside of the U.S., unless more than 50% of the issuers outstanding voting securities are held directly or indirectly by residents of the U.S., and any of the following applies: the majority of the issuers executive officers or directors are U.S. citizens or residents; the majority of the issuers assets are located in the U.S.; or the issuers business is principally administered in the U.S. Securities held of record by a broker, dealer, bank or nominee for the accounts of customers residing in the U.S. are counted as held in the U.S. by the number of separate accounts for which the securities are held.

50 This is MoFo. 50 Annual Qualification Test An FPI is only required to determine its status on the last business day of the most recently completed second fiscal quarter. An FPI that obtains its issuer status is not immediately obligated to comply with U.S. reporting obligations. Reporting obligations begin the first day of the FPIs next fiscal year, when it is required to file an annual report on Form 20-F for the fiscal year its issuer status was determined (within four months of the end of that fiscal year). However, a foreign company that obtains FPI status following an annual qualification test can avail itself of the benefits of FPI status immediately.

51 This is MoFo. 51 How Does an FPI Become Subject to U.S. Reporting Requirements? An FPI will be subject to the reporting requirements under U.S. federal securities laws if: it registers with the SEC the public offer and sale of its securities under the Securities Act; it lists a class of its securities, either equity or debt, on a U.S. national securities exchange (e.g., NYSE and Nasdaq); or within 120 days after the last day of its first fiscal year in which the issuer had total assets that exceed $10,000,000 and a class of equity securities held of record by either: (1) 2,000 or more persons or (2) 500 persons who are not accredited investors in the United States (or, in the case of an FPI that is a bank holding company, if it had total assets that exceeded $10,000,000 and a class of equity securities held of record by either 2,000 or more persons). However, an FPI may also deregister more easily than a domestic issuer.

52 This is MoFo. 52 Considerations for Being a Public Company in the U.S. Foreign issuers usually weigh having greater access to capital and the imprimatur of success associated with a public offering in the U.S. with the following concerns: Heightened disclosure standards Corporate governance considerations, stemming from SRO requirements and requirements under the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) Accounting related disclosures Possibility for exiting the system (deregistration) Litigation exposure

53 This is MoFo. 53 Benefits Available to FPIs A FPI may exit (or deregister) the U.S. reporting regime more easily than a U.S. issuer Quarterly reports: A FPI is not required to file quarterly reports Proxies: A FPI is not required to file proxy statements Ownership reporting: No Section 16 reporting Governance: A FPI may choose to rely on certain home-country practices XBRL: Temporary XBRL relief for FPIs Internal controls: Annual internal control reporting Executive compensation: As a FPI, certain of the more onerous executive compensation disclosure requirements are not applicable IFRS without GAAP reconciliation 12g3-2(b) exemption

54 This is MoFo. 54 Confidential Submissions Only certain kinds of FPIs may now confidentially submit registration statements: An FPI that is listed or is concurrently listing its securities on a non-U.S. securities exchange, An FPI that is being privatized by a foreign government, or An FPI that can demonstrate that the public filing of an initial registration statement would conflict with the law of an applicable foreign jurisdiction. In addition, shell companies, blank check companies and issuers with no or substantially no business operations are precluded from using the confidential submission process.

55 This is MoFo. 55 Confidential Submissions (contd) However, an FPI may still qualify as an emerging growth company (EGC) under Title I of the Jumpstart Our Business Startups Act (the JOBS Act), in which case it could still submit registration statements confidentially, provided that: The FPI elects to be treated as an EGC; and The initial confidential submissions and all amendments are filed with the SEC no later than 21 days prior to the FPIs commencement of the road show.

56 This is MoFo. 56 EGCs An EGC is defined as an issuer with total gross revenues of under $1 billion (subject to inflationary adjustment by the SEC every five years) during its most recently completed fiscal year. A company remains an EGC until the earlier of five years or: the last day of the fiscal year during which the issuer has total annual gross revenues in excess of a $1 billion (subject to inflationary indexing); the last day of the issuers fiscal year following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act; the date on which such issuer has, during the prior three-year period, issued more than $1 billion in nonconvertible debt; or the date on which the issuer is deemed a large accelerated filer. An issuer will not be able to qualify as an EGC if it first sold its common stock in an initial public offering (IPO) prior to December 8, 2011.

57 This is MoFo. 57 Other EGC Accommodations For FPIs that are EGCs, the JOBS Act allows for a streamlined IPO on-ramp process in order to phase-in some of the more comprehensive and costly disclosure requirements. For instance, an EGC has the option to do the following: Testing- the- Waters: An EGC is permitted to engage in oral or written communications with qualified institutional buyers (QIBs) and institutional accredited investors in order to gauge their interest in a proposed IPO, either prior to or following the initial filing of the IPO registration statement. Research Reports: Broker-dealers are permitted to publish or distribute a research report about an EGC that proposes to register or is in registration. The research report will not be deemed an offer under the Securities Act regardless of whether the broker-dealer intends on participating, or is currently participating, in the offering.

58 This is MoFo. 58 EGC Accommodations (contd) Audited Financials: An EGC is required to present only two years of audited financial statements (as opposed to three years) in connection with its IPO registration statement. In any other registration statement or periodic report, an EGC need not include financial information within its selected financial data or in its Management Discussion and Analysis disclosure for periods prior to those presented in its IPO registration statement. Auditor Attestation Report on Internal Control: An EGC is exempt from the requirement to obtain an attestation report on internal control over financial reporting from its registered public accounting firm.

59 This is MoFo. 59 Accounting Considerations

60 This is MoFo. 60 Accounting Considerations FPIs that prepare their financial statements under U.S. GAAP will find that the SEC will require additional disclosures and other explanations in their financial statements. In addition, FPIs that prepare financial statements under U.S. GAAP should be prepared to address SEC accounting comments regarding their registration statements.

61 This is MoFo. 61 Elimination of GAAP Reconciliation Modified financial disclosures Under Item 18 of Form 20-F, an FPI is required to make certain disclosures regarding its financial statements. Traditionally, an FPI listing securities in the U.S. was required to either prepare its financial statements in accordance with U.S. GAAP or reconcile its financial statements to those rules. Most FPIs were obligated to provide information that was not otherwise required under their home countries GAAP.

62 This is MoFo. 62 Elimination of GAAP Reconciliation (contd) New SEC rules omit U.S. GAAP reconciliation requirements if an FPI satisfies the following conditions: The financial statements must be prepared in accordance with the English language version of the International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (the IASB); The FPI must state in the notes to the financial statements that its financial statements are in compliance with IFRS as issued by the IASB; and The FPI must provide an opinion by an independent auditor stating that the financial statements are in compliance with IFRS as issued by the IASB.

63 This is MoFo. 63 GAAP Reconciliation and IFRS Convergence General Instruction G to Form 20-F permits eligible foreign private issuers to file only two years of statements of income, shareholders equity and cash flows prepared in accordance with IFRS for their first year of reporting in accordance with IFRS. In its second year of IFRS reporting and thereafter, an FPI must provide three years of audited IFRS financials. FPIs that do not prepare their financial statements in accordance with IFRS as issued by the IASB can either: Continue to reconcile their financial statements to U.S. GAAP; or Include in their IFRS financial statements such additional information as is necessary to comply with the IASB issued IFRS, as well as the jurisdiction specific IFRS.

64 This is MoFo. 64 Convenience Translations and Exchange Rates If the reporting currency is not the U.S. dollar, U.S. dollar-equivalent financial statements or convenience translations are not permitted to be included, except that an FPI may present a translation of the most recent fiscal year and any subsequent interim period. The exchange rate used for any convenience translations should be as of the most recent balance sheet date included in the registration statement, except where the exchange rate of the most recent practicable date would yield a materially different result. In addition, FPIs that do not prepare their financial statements in U.S. dollars must provide disclosure of the exchange rate between the reporting currency and the U.S. dollar.

65 This is MoFo. 65 Corporate Governance Considerations

66 This is MoFo. 66 Corporate Governance: Audit Committee Item 6.C.3 of Form 20-F requires an FPI to disclose the names and method of operation of its audit committee (however, an FPI has no legal obligation to establish an audit committee). Section 10A-3 of the Exchange Act, pursuant to Rule 10A(m) of the Exchange Act and Section 301 of Sarbanes-Oxley, contains specific rules for how to conduct and organize an audit committee (each securities exchange also imposes its own set of rules regarding audit committees). An FPI is required to disclose in its periodic reports whether the audit committee includes at least one financial expert. The audit committee must: (1) exercise independence; (2) possess the authority to employ, compensate and oversee the work of the independent auditors; (3) possess the authority to employ and compensate outside advisors; and (4) implement procedures for handling complaints regarding accounting, internal accounting control or auditing matters, including confidential, anonymous submission by employees of the issuer of concern regarding questionable accounting or auditing matters.

67 This is MoFo. 67 Audit Committee: Composition and Exemptions Each audit committee member must be a member of the board of directors of the issuer, and must be otherwise independent. Under Rule 10A-3(b) of the Exchange Act, in order to maintain independence, an audit committee member may not (except in his or her capacity as a member of the audit committee, the board of directors or any other board committee): Accept directly or indirectly any consulting, advisory, or other compensatory fee from the issuer or any subsidiary thereof, provided that, unless the rules of the national securities exchange or national securities association provide otherwise, compensatory fees do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the listed issuer (provided that such compensation is not contingent in any way on continued service); or Be an affiliated person of the FPI or any subsidiary of the FPI. Recognizing that there may be conflicts of law between home-country and domestic practices, the SEC established exemptions to the independence requirement tailored to accommodate differing global practices (e.g., employee represented, two-tiered board system, controlling security holder representation, foreign government representation and board of auditors).

68 This is MoFo. 68 Audit Committee: Financial Experts Under Item 16A of Form 20-F, an FPI is required to disclose whether its audit committee has at least one audit committee financial expert (ACFE). An FPI must disclose the name of the ACFE and whether that person is deemed independent, as defined under Rule 10A-3(b) of the Exchange Act. An ACFE is defined as any person with the following attributes (obtained through education and experience by serving as an officer, accountant, or auditor, by supervising such individuals, or any other relevant experience): An understanding of generally accepted accounting principles and financial statements; The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; Experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issuers that are generally comparable to those raised by the issuers financial statements or experience actively supervising one or more persons engaged in such activities; An understanding of internal control over financial reporting; and An understanding of audit committee functions.

69 This is MoFo. 69 Corporate Governance: Compensation Committee Under Item 6.C.3 of Form 20-F, an FPI must disclose information regarding its compensation committee, including the names of committee members and a summary of the terms under which the committee operates. Each securities exchange may impose specific disclosure requirements with respect to compensation committees.

70 This is MoFo. 70 Ongoing Reporting Obligations and Governance

71 This is MoFo. 71 Annual Report on Form 20-F The information required to be disclosed in an Annual Report on Form 20-F includes, but is not limited to, the following: operating results; liquidity and capital resources; trend information; off-balance sheet arrangements; consolidated financial statements and other financial information; significant business changes; selected financial data; risk factors; history and development of the FPI; business overview; and organizational structure.

72 This is MoFo. 72 Annual Report on Form 20-F (contd) A Form 20-F also must contain a description of the FPIs corporate governance and a statement regarding those corporate governance practices that conform to its home-country requirements and not those of the U.S. national securities exchanges on which its securities are listed. An FPI must also disclose information relating to changes in, and disagreements with, the FPIs certifying accountant, including a letter, which must be filed as an exhibit, from the former accountant stating whether it agrees with the statements furnished by the FPI and, if not, stating the respects in which it does not agree. An FPI may also be required to disclose specialized information (e.g., mine health and safety and oil and gas operations that are material to its business operation or financial position).

73 This is MoFo. 73 Reports on Form 6-K Reports on Form 6-K generally take the place of Quarterly Reports on Form 10-Q (which include financial reports) and Current Reports on Form 8-K (which include disclosure on material events) that U.S. domestic issuers are required to file. Unlike Form 10-Q or Form 8-K, there are no specific disclosures required by Form 6-K. Instead, an FPI must furnish under cover of Form 6-K information that it: makes or is required to make public pursuant to the laws of the jurisdiction of its domicile or the laws in the jurisdiction in which it is incorporated or organized; files or is required to file with a stock exchange on which its securities are traded and which was made public by that exchange; or distributes or is required to distribute to its security holders. Reports on Form 6-K must be furnished to the SEC promptly after the information is made public by an FPI, as required by the country of its domicile or under the laws of which it was incorporated or organized, or by a foreign securities exchange with which the FPI has filed the information.

74 This is MoFo. 74 Sarbanes-Oxley Requirements Section 302 of Sarbanes-Oxley requires certifications by an FPIs CEO/CFO regarding the effectiveness of the FPIs disclosure controls and procedures, the completeness and accuracy of the FPIs reports filed under Section 13(a) and 15(d) of the Securities Act, and any deficiencies in, and material changes to, the FPIs internal control over financial reporting. Section 302 reporting begins once the FPI is an SEC registrant. These certifications must be included in the FPIs Form 20-F. Other reports filed or furnished by the FPI, such as reports on Form 6-K, are not subject to the certification requirements. Section 404 of Sarbanes-Oxley requires an annual report by both management and external auditors regarding the effectiveness of the companys internal controls over financial reporting. Section 404 reporting begins with the second annual filing with the SEC. FPIs that are non-accelerated filers do not have to provide the auditors attestation.

75 This is MoFo. 75 Disclosure controls and procedures are controls and other procedures designed to ensure that the information required to be disclosed in the reports filed under the Exchange Act, on a timely basis, are recorded, processed, summarized and reported. Disclosure controls and procedures include, but are not limited to, controls and procedures designed to ensure that information required to be disclosed by a company in its Exchange Act reports is appropriately accumulated and communicated to the companys management, including its principal executive and financial officers, to allow timely decisions regarding required disclosure. Important to have an up the chain process of reporting from lower managers to CEO and CFO. Disclosure Controls and Procedures

76 This is MoFo. 76 Enhanced Disclosure Obligations for FPIs There are enhanced disclosure requirements regarding an FPIs Annual Report on Form 20-F. The enhanced disclosures apply to the following areas: Changes in or disagreements with the FPIs certifying public accountant ADR fees, payment and other charges Differences in corporate governance practices Under Item 16G of Form 20-F, an FPI must provide a summary of the differences between its corporate governance practices and those applicable to U.S. companies under the relevant securities exchanges listing rules. Securities exchanges, such as the NYSE and Nasdaq, require disclosures of differences between an FPIs corporate governance, based on home-country practice and the requirements of the exchange.

77 This is MoFo. 77 Financial Statement Reporting An FPI must provide significant disclosures regarding its financial condition under Item 8 and Item 18 of Form 20-F. Item 8 of Form 20-F sets forth the financial information that must be included, as well as the periods covered and the age of the financial statements. In addition, Item 8 obligates an FPI to disclose any legal or arbitration proceedings involving a third party that may have, or have recently had, a significant impact on the FPIs financial position or profitability, as well as any significant changes since the date of the annual financial statements (or since the date of the most recent interim financial statements). Item 18 of Form 20-F addresses the requirements for an FPIs financial statements and accountants certificates that must be furnished with the Form 20-F. Under Item 18 of Form 20-F, an FPI that presents its financial information on a basis other than U.S. GAAP or IFRS as issued by IASB must nevertheless provide all of the information required by U.S. GAAP and Regulation S-X.

78 This is MoFo. 78 Financial Statement Reporting (contd) In the past, certain FPIs were permitted to omit segment data from their financial statements that were otherwise prepared in accordance with U.S. GAAP pursuant to Item 17 of Form 20-F, but the SEC has eliminated this accommodation. However, Item 17 compliance will still be permitted for non-issuer financial statements such as those pursuant to Rules 3-05, 3-09, 3-10(i) and 3-14 of Regulation S-X, as well as non-issuer target company financial statements included in Forms F-4 and proxy statements. Item 17 will also continue to be permitted for pro forma information pursuant to Article 11 of Regulation S-X. An FPI that prepares financial statements in accordance with U.S. GAAP is now required to provide financial information to the SEC in XBRL data format (as well as post XBRL data on its publicly available website). Detailed tagging of footnotes and schedules for fiscal periods ending on or after June 15, 2012 is also required. An FPI that prepares financial statements in accordance with IFRS as issued by the IASB will not be required to provide financial information in an interactive data format using XBRL until the SEC specifies the XBRL taxonomy for IFRS financial statements.

79 This is MoFo. 79 Reporting Obligations of Beneficial Owners Insiders of an FPI are not subject to the short-swing profit limits set forth in Section 16(b) of the Exchange Act, nor are they required to comply with the Section 16(a) reporting requirements (disclosing holdings of, and transaction in, equity securities of the FPI). However, beneficial owners, subject to the disclosure requirement under Section 13(g) of the Exchange Act, are required to file with the SEC a statement on either Schedule 13D or Schedule 13G. Rule 13d-1 of the Exchange Act mandates that a person who acquires, directly or indirectly, beneficial ownership of a class of registered equity security, must file a statement containing the information required by Schedule 13D with the SEC, within 10 business days. Alternatively, certain holders of securities of an FPI may be permitted to report their beneficial ownership on Schedule 13G, pursuant to Rule 13d-1(b). The disclosures under Schedule 13G are considerably less detailed than those required by Schedule 13D.

80 This is MoFo. 80 Specialized Disclosure Requirements

81 This is MoFo. 81 Dodd-Frank Act Governance and Disclosure Provisions Many provisions of The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) have extraterritorial effect and apply to foreign issuers, including financial institutions that conduct banking activities. Executive compensation and corporate governance provisions: Sec. 951: Say on Pay – not applicable to FPIs Sec. 952: Compensation Committee Independence Sec. 953: Pay vs. Performance & Pay Disparity Sec. 954: Compensation Clawbacks Sec. 955: Employee and Director Hedging Disclosure Sec. 972: Disclosure of CEO and Chairman Separation Specialized disclosure provisions: Sec. 956: Executive Compensation at Financial Institutions

82 This is MoFo. 82 Compensation Committee Independence (Sec. 952) and Compensation Clawbacks (Sec. 954) Independent Compensation Committee Applies to FPIs unless the FPI provides annual disclosure of the reasons it does not have an independent compensation committee. For FPIs with two-tiered board, board of directors means non-management board. Independence of Compensation Consultants and Disclosure of Conflicts of Interest Unclear if applies to FPIs. Proposing release notes that Sec. 952 makes no distinction between domestic and foreign issuers…. However, proposed implementation through Regulation S-K, and FPIs have historically been exempted from similar requirements. Compensation Clawbacks Unclear if applies to FPIs and no rules yet proposed. Exchanges must implement rules mandating that listed companies (1) adopt and disclose an incentive compensation clawback policy and (2) impose a clawback mechanism disgorging certain incentive compensation of executives in the event of a restatement.

83 This is MoFo. 83 Provisions for Covered Financial Institutions (Sec. 956) Who is covered? Any FPI (or U.S. entity within an FPI) that is a covered financial institution with $1 billion or more in total consolidated assets. Includes depositary institutions and their holding companies, registered broker- dealers and investment advisers. Larger covered financial institutions, entities with $50 billion or more in total consolidated assets, are subject to additional requirements. Sec. 956 establishes added disclosure and substantive regulation of financial institution compensation practices.

84 This is MoFo. 84 Disclosure of Financial Institution Compensation A covered financial institution must provide an annual report to regulators, disclosing: The structure of its incentive-based compensation arrangements sufficient to determine whether the structure provides excessive compensation, fees, or benefits or could lead to material financial loss to the institution. For larger covered financial institutions, specific descriptions of incentive compensation for executive officers and other covered persons who have the ability to expose the institution to possible material losses. Level of detail provided commensurate with size and complexity of covered financial institution and scope of nature of incentive compensation. Covered financial institutions may not establish or maintain any type of compensation arrangement that encourages inappropriate risks by providing a covered person with excessive compensation. Agencies to determine reasonableness of compensation. For larger covered financial institutions, additional requirements: Mandatory deferrals for executive officers (at least 50% of incentive compensation deferred over at least 3 years); and Board review of incentive compensation of key risk taker employees.


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