January 11, 2018
It is now time for foreign private issuers to prepare their annual reports on Form 20-F. For companies with a calendar year-end, the Form 20-F must be filed with the U.S. Securities and Exchange Commission (the SEC) by 1 May 2018.
To help you with the preparation of this filing, we highlight the following recent developments, trends and topics that may be important focus areas of the SEC in the 2018 review process.
Disclosures of financial measures that do not conform either to U.S. GAAP or IFRS (collectively, “non-GAAP”) continue to be an area of importance for the SEC, as indicated by its comments on Form 20-F and other filings in 2017. Since the SEC updated its compliance and disclosure interpretations (C&DIs) regarding the use of non-GAAP financial measures in May 2016 (see here), it has increased focus on non-GAAP measures. In the 2017 commenting season, the SEC Staff highlighted the following topics:
As in past years, the Office of Global Security Risk of the SEC’s Division of Corporation Finance continues to review annual reports on Form 20-F for transactions in or with countries and entities subject to sanctions implemented by the Office of Foreign Assets Control of the U.S. Department of Justice. In its comment letters, the SEC has required Form 20-F filers to disclose any past, current and anticipated contacts with sanctioned countries, such as direct or indirect agreements, commercial arrangements or other contacts with the governments of those countries or any entities that might be controlled by those governments. Given this practice, Form 20-F filers may want to review their prior filings to prepare themselves for any inquiries in this area.
In particular, the comments have instructed Form 20-F filers to provide disclosure on any associated revenues, assets and liabilities derived from operations in countries designated by the U.S. Department of State as state sponsors of terrorism. Additionally, Form 20-F filers were also requested to include disclosure in their Form 20-F on the absence of such activity, if the issuer had included such disclosure for previous periods. The SEC takes a broad interpretation of the requirement to disclose contacts with sanctioned countries and has requested that companies provide information regarding past, current and anticipated contacts with sanctioned countries, whether through subsidiaries, joint ventures or other direct or indirect arrangements. For further details, please see the section “Sanctions Update,” below.
The SEC Chairman has specifically referenced the duty of companies to disclose material information about cyber risks and cyber events. While comments on this topic have thus been limited, and related to domestic issuers, it is anticipated that this will continue to be an area of focus for the SEC going forward, and 20-F filers should review their risk factor disclosure on this topic.
In a continuation of historical trends, internal controls procedures have continued to receive attention from the SEC staff in comment letters. Where material weaknesses in internal controls over financial reporting have been identified, Form 20-F filers must include a discussion on the assessment of existing controls and the implementation of changes to enhance their internal controls.
Despite officially renewing sanctions relief under the 2015 Joint Comprehensive Plan of Action (JCPOA), as Iran appears to be abiding by its obligations under the agreement, the Trump Administration has continued to expand non-nuclear related sanctions targeting specific individuals and entities for supporting the country’s ballistic missile testing program, or for playing a role in regional unrest more generally. Political sentiment in both countries casts doubt on the future viability of the United States’ participation in the JCPOA. This remains a rapidly evolving area of policy.
On 2 August 2017, President Trump signed into law the “Countering America’s Adversaries Through Sanctions Act,” (the CAATSA) which imposes new sanctions against Russia.
The CAATSA imposes primary sanctions on U.S. Persons’ activities (prohibition on supplying Russian oil projects; tightening of certain debt financing restrictions on Sectoral Sanctions Identifications-listed entities), and imposes secondary sanctions targeting non-U.S. persons’ activities (blocking sanctions, including for cyber activity; termination or restriction of access to the United States for foreign financial institutions engaging in financial transactions on behalf of certain OFAC designated Russian persons or involving investments in Russian crude oil projects (i.e., deepwater, Arctic offshore, or shale projects); restriction on investments in special Russian crude oil projects). Finally, the Act allows the President to impose, in a discretionary fashion, secondary sanctions relating to Russian energy-export pipelines.
On 27 and 31 October, 2017, the U.S. Department of State issued public guidance on the implementation of the CAATSA. With regards to potential sanctions against individuals or entities that knowingly engage in “significant transactions” with a Russian nexus, (i.e. with persons that are a part of, or operating for or on behalf of, Russia’s defense or intelligence sectors), such guidance provided a list of entities considered by the State Department to be operating in Russia’s defense or intelligence sectors. The guidance includes a discussion as to whether a transaction is “significant” for purposes of the CAATSA. As such, defense and intelligence-related transactions are more likely to be considered “significant,” while transactions with civil parties or transactions required by law with the Federal Security Service are less likely to raise any sanctions risks.
The second set of guidance focuses on the State Department’s view on secondary sanctions relating to investments in special Russian crude oil projects and energy export pipelines. It defines several key terms and narrows the potential scope of several provisions, removing some uncertainty regarding how the U.S. government intends to apply these new sanctions.
On 23 October 2017, the SEC adopted PCAOB’s new audit standard on auditor’s reports content and presentation. Enhanced information is expected to be included in audit reports. Part of the new standard requirements are effective for annual reporting periods ending on or after 15 December 2017. For audit reports included in this year’s Form 20-F, this new standard will require auditors, to provide information about auditor’s tenure (i.e. year the audit firm began consecutively serving as the issuer’s auditor), make a statement on the auditor’s independence, include standardized language relating to the role and responsibilities of the auditor and address the report to the shareholders and directors of the reporting company.
For large accelerated filers and other filers, from annual periods ending on or after, respectively, 15 June 2019 and 15 December 2020, auditors will have to include in their report information about matters that they communicated or were required to communicate to the company’s audit committee that relate to material accounts or disclosures and involve especially challenging, subjective or complex auditor judgement.
Foreign private issuers that prepare financial statements in accordance with IFRS are now required, beginning with annual reports on Form 20-F filed in 2018 relating to fiscal years ending on or after 15 December 2017, to provide a version of their financial statements in interactive data format using eXtensible Business Reporting Language (XBRL) in addition to providing financial statements in their traditional format. Previously, foreign private issuers could voluntarily file financial data in XBRL format, although they were not required to comply with XBRL reporting, because the SEC had not specified tags for certain pieces of data—known as “taxonomy”—specifically applicable to IFRS.
New rules requiring hyperlinking of exhibits in SEC filings took effect in September 2017. The SEC adopted these rules in order to make access to exhibits in registration statements and periodic reports that were originally provided in previous filings easier for market participants to locate. The new rules apply to Form 20-F, but will not apply to Form 6-Ks.
The Division of Corporation Finance last updated its C&DIs on Securities Act Forms and Rules as well as Exchange Act Forms in October 2017. The C&DIs are available here.
The Division of Corporation Finance last updated its Financial Reporting Manual in December 2017. The Financial Reporting Manual is available here.
In the prior edition of this memo, we updated you on the proposed rule, commonly known as “publish what you pay,” which would have required resource extraction issuers to disclose payments they make to governments for the commercial development of oil, natural gas or minerals, and which was scheduled to take effect for the 2018 20-F season. However, on 3 February 2017, U.S. Congress passed a resolution that disapproves the SEC’s rule on resource extraction payments, resulting in the rule no longer being in effect.
On December 4, 2017, the NYSE adopted a rule change prohibiting NYSE-listed companies from publishing material news after the official closing time for the NYSE’s trading session until the earlier of 4:05 p.m. Eastern Time (“ET”) or the publication of the official closing price of the listed company’s security. This rule is implemented to alleviate confusion caused by price discrepancies between the NYSE closing price and trading prices on other markets after the NYSE official closing time and before the NYSE closing auction is completed, which can be after 4:00 p.m. ET.
On June 13, 2017, the NYSE proposed a rule change to require listed companies to provide notice to the NYSE at least ten minutes before making any public announcement with respect to a dividend or stock distribution, including when the notice is outside of NYSE trading hours. The effective date will be February 1, 2018.
 The SEC’s release adopting Regulation G, which sets out the rules governing the use of non-GAAP financial measures in public disclosures generally, is available here.
 In securities offerings exempt from SEC registration pursuant to Rule 144A under the U.S. Securities Act of 1933, while the practice is to follow the SEC rules as closely as possible, there is often flexibility to depart from a strict application of the rules.
 In a related recent development, certain clearing systems (such as Euroclear/Clearstream) are requiring representations from the issuer relating to compliance with sanctions laws prior to admitting securities for clearing.