Developments applicable to certain categories of issuers
Trends in SEC comment letters in 2021
Other updates


It is now time for foreign private issuers (FPIs) 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 US Securities and Exchange Commission (SEC) by 2 May 2022 (which is the first business day following 30 April 2022).

This article is part of a series of articles that provide an overview of recent developments, trends and topics that are relevant to FPIs preparing their 2021 Form 20-F. For earlier articles in the series, see "Annual report time: approaching 2021 Form 20-F and SEC updates" and "Annual report time: disclosure focus areas".

Developments applicable to certain categories of issuers

Statistical disclosures by bank holding companies (replacement of Guide 3)
In September 2020, the SEC finalised rules that replaced Industry Guide 3, the industry guide for banking organisations. In addition to streamlining the statistical disclosures required for banks, bank holding companies and savings and loan registrants, the rules eliminate a number of requirements formerly set out under Guide 3, and which under applicable accounting rules are now captured in the financial statements. The new rules are within the new Subpart 1400 of Regulation S-K.

These new rules apply starting for fiscal years ended on or after 15 December 2021, and are therefore applicable to the forthcoming 2021 Form 20-F for companies with a calendar year-end. Voluntary early compliance was permitted. Guide 3 will be rescinded effective 1 January 2023. The overlap between the mandatory implementation date for the new rules and the rescission date of existing Guide 3 (1 January 2023) is to allow those registrants who had existing registration statements on file prior to the mandatory implementation date to continue to rely on the existing Guide 3 requirements.

For a more complete review of the new rules, see "At Long Last—SEC modernizes guide 3 disclosures for banking registrants".

Mining disclosure rules (replacement of Guide 7)
In October 2018, the SEC adopted a new framework for reporting reserves and other disclosures by mining companies, which is codified in Subpart 1300 of Regulation S-K. The new rules are intended to harmonise the SEC's mining property disclosure requirements with current industry and global regulatory practices and standards, reflecting an acknowledgement of the significant globalisation that has occurred in the industry since Guide 7 was adopted. The new rules take effect beginning with a company's first fiscal year beginning on or after 1 January 2021, and are therefore applicable to the forthcoming 2021 Form 20-F for companies with a calendar year-end.

For more information on the new mining disclosure rules, see "SEC Overhauls Disclosure Requirements for Mining Companies".

Companies based in mainland China and Hong Kong: Holding Foreign Companies Accountable Act
The Holding Foreign Companies Accountable Act 2020 (HFCAA) limits access to the US capital markets for public companies that are audited by registered public accounting firms which are not subject to inspection by the Public Company Accounting Oversight Board (PCAOB). The PCAOB is currently unable to make inspections of accounting firms in mainland China and Hong Kong.

The HFCAA amends the Sarbanes-Oxley Act 2002 in a number of significant ways, including:

  • identification of issuers – the SEC is required to identify SEC reporting companies whose financial statements are audited by an accounting firm located in a foreign jurisdiction that the PCAOB is unable to inspect due to a position taken by an authority in that foreign jurisdiction where the audits are performed. The SEC has indicated it will identify issuers pursuant to the HFCAA requirements after the filing of annual reports for the year ended 31 December 2021;
  • delisting after three consecutive years of inability of PCAOB to inspect – the SEC is required to prohibit trading on any US national securities exchange and in the over-the-account market if the PCAOB is unable to inspect an SEC reporting company's auditor for three consecutive years. Therefore, the earliest an issuer could be delisted under these provisions would be after the filing of a registrant's 2023 annual report, which would be filed in 2024;
  • disclosure on governmental ownership and control – SEC-identified issuers will be required to submit documentation through the electronic data gathering, analysis and retrieval (EDGAR) system to establish, if true, that the issuer is not owned or controlled by a governmental entity in the jurisdiction of the relevant public accounting firm; and
  • additional annual report disclosure requirements – issuers that file annual reports with financial statements audited by an auditor which did not permit PCAOB inspection will be required to include specified disclosures within the relevant Form 10-K or Form 20-F. These disclosure requirements apply to the annual report for each year in which the issuer was an SEC-identified issuer, so this would not apply until the 2022 Form 20-F filed in 2023 for companies with a calendar year-end. In Form 20-F, these amendments are included under Item 16I (disclosure regarding foreign jurisdictions that prevent inspections).

In addition to the requirements of the HFCAA, the SEC is also focused on additional disclosures for investor protection related to companies based in China, including risks relating to many China-based operating companies that are structured as variable interest entities as well as regulatory oversight risks relating to bringing and enforcing actions against China-based issuers. On 20 December 2021, the SEC's division of corporation finance published a sample comment letter to China-based issuers in which the staff of the SEC addresses these additional disclosures. The sample comment letter includes an illustrative, non-exhaustive list of comments that the SEC's division of corporation finance may issue to companies seeking more prominent disclosure about the legal and operational risks associated with China-based companies.

Therefore, relevant issuers should review the sample comment letter in detail and consider including prominent disclosure of these matters and the risk related to HFCAA in their 2021 Form 20-F.

Trends in SEC comment letters in 2021

As required by the Sarbanes-Oxley Act 2002 (SOX), the staff of the SEC are required to undertake some level of review of a Form 20-F filing of a registrant at least once every three years, but the SEC will take a risk-based approach in issuing comments. There is a continuing trend of the staff of the SEC issuing fewer comments, with comments often focusing on key focus areas. In 2021, the majority of comment letters contained only one or two comments.

Internal control over financial reporting and disclosure controls and procedures
The most frequently occurring comment on Form 20-F annual reports during 2021 related to mistakes in disclosures relating to internal control over financial reporting and disclosure controls and procedures when a company files its second annual report. SEC rules permit newly public companies to delay including management's assessment of internal controls under section 404(a) of SOX until the company's second annual report. Many companies failed to update the Exhibit 12.1 and 12.2 certifications at such transition to include the wording prescribed by Instruction 12 to Item 19 of Form 20-F.

In addition, companies should be precise about the wording used when disclosing their assessment of internal control over financial reporting and disclosure controls and procedures. Examples that had failed to use the words "effective" or "ineffective" often resulted in comment letters being issued.

Disclosures of non-GAAP financial measures
As observed in recent years, the SEC continues to focus on the use of financial measures that do not conform either to US generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS) (collectively, "non-GAAP") in its review of Form 20-F annual reports and other disclosures by FPIs.

SEC comment letters in 2021 again addressed compliance with the SEC's rules and guidance regarding disclosure of non-GAAP financial measures, including:

  • adjustments for covid-19 – the SEC issued various comments on non-GAAP measures that had been adjusted for effects of the covid-19 pandemic. Comments mainly sought more information about the nature of the non-GAAP adjustments and the method used to calculate them, as well as whether adjustments are incremental to, and separable from, normal operations. Examples of adjustments that would typically not be appropriate would include estimated lost revenue and excess overhead costs such as temporarily idled facilities;
  • titles of non-GAAP measures – the SEC issued various comment letters that emphasised the need to ascribe appropriate titles to non-GAAP measures. For example, if earnings before interest, taxes, depreciation and amortisation (EBITDA) modifies net income more than by just interest, taxes, depreciation and amortisation, then this should often be labelled "adjusted EBITDA". If a non-GAAP measure is calculated other than as commonly understood in the market (such as calculating free cash flow other than as cash flow from operations minus capital expenditure), then the title ascribed to such measure may need to include "adjusted" or other appropriate label; and
  • "equal or greater prominence" and disclosures on purpose and use – as in recent years, the SEC continued to emphasise that non-GAAP financial measures should not be presented with greater prominence than the corresponding GAAP or IFRS financial measure, as the case may be. In addition to the importance of balanced presentation, comment letters also continued to reiterate the need to include clear and detailed disclosure to explain the usefulness of such non-GAAP measures to investors and how management uses such measures.

Issuers should continue to focus on the requirements of Item 10 of Regulation S-K and Regulation G with respect to the presentation of non-GAAP financial measures.

Disclosure in MD&A (Item 5 – operating and financial review and prospects)
The management's discussion and analysis (MD&A) section remains the leading source of SEC comments. Consistent with one of its principal goals – investor protection – comment letters during 2021 continued to focus on the importance of enabling investors to see companies "through the eyes of management". The majority of comments on Form 20-F annual reports focused on:

  • greater specificity in key disclosures, such as identifying the underlying drivers of material changes in financial results; and
  • transparency and completeness of the discussion of key performance indicators (KPIs) (such as KPIs discussed in earnings calls, earnings releases or slide decks but not included in the Form 20-F).

A recurring theme for comments (including comments on the notes to the financial statements) was for companies to provide more specific and detailed disclosure on the factors driving increases in allowance for doubtful accounts, including more granular disclosure on how an issuer determined the appropriate allowance for doubtful accounts. Companies that have experienced significant changes in doubtful accounts, as a result of the covid-19 pandemic or otherwise, should ensure that their disclosure is sufficiently detailed in order to provide a clear understanding of the changes or trends in credit quality that are driving a company's allowance for doubtful accounts.

Given that FPIs do not file quarterly reports on Form 10-Q, unless a company has been through an SEC review process for an offering, the 2021 Form 20-F review season will be the first time their disclosures in relation to covid-19 may be reviewed by the SEC.

Segment reporting
As in previous years, the staff of the SEC have continued to focus on segment reporting and numerous comment letters focus on how companies apply accounting standards codification 280/IFRS 8 segment reporting in their financial statements. Comment letters focused on how companies identified their operating segments and how companies aggregate operating segments into reportable segments. This was particularly evident when companies only have one reportable segment, where the SEC was seeking further information as to the basis upon which companies determined that they have one reportable segment. As part of this focus, the staff of the SEC also continue to ask registrants to explain any inconsistencies between how the business is described in public information (including other parts of the Form 20-F) and how it is described in the segment footnotes to the financial statements.

Other updates

Notifications of delayed filings on Form 12b-25
If a company is unable to file its Form 20-F annual report by the due date, it is able to file a Form 12b-25 (also referred to as "Form NT") no later than one business day after the due date of the annual report. If a company timely files a Form NT, the company has an additional 15 days to file its Form 20-F annual report and still be deemed to have filed its annual report on a timely basis under its Exchange Act reporting obligations.

However, care should be taken when completing a Form NT because the form requires a company to state whether it anticipates any significant change in its results of operations for the prior year. If any such significant changes are anticipated, the company is required in the Form NT to explain such significant changes in narrative and quantitative form, or to explain why reasonable estimates cannot be provided.

On 29 April 2021, the SEC announced that it had settled charges against eight public companies for allegedly failing to disclose in Form NT filings that the companies anticipated restatements of, or corrections to, financial statements in either a Form 10-K or Form 10-Q. Each of the relevant companies subsequently announced restatements or corrections in financial statements within four to 14 days following the filing of their Form NT. Each company agreed to pay a penalty of either $25,000 or $50,000, depending on the number of alleged violations. In its announcement, the staff of the SEC noted that they had used data analytics to identify potential disclosure violations.

Therefore, if a company does expect a significant change versus its prior year results of operations (including anticipated restatements or corrections), the company should not be silent about such changes and should not provide merely boilerplate or vague disclosure in a Form NT. As such, when a company anticipates the need to make a Form NT filing as a result of a late Form 20-F, it should work with its counsel and accountants sufficiently in advance of the due date in order to formulate appropriate narrative and quantitative disclosures that provide meaningful disclosure for investors.

SEC proposes new disclosure rules for share repurchases
On 15 December 2021, the SEC proposed a new rule that would, among other things, require SEC reporting companies (including FPIs) to report any share repurchases on a new Form SR one business day after the issuer executes a share repurchase, as well as requiring significant additional disclosures regarding the structure of a company's repurchase programme and executed share repurchase transactions. The comment period for the proposed new rule is 45 days, beginning from the date the rule is first published in the Federal Register.

FPIs are currently required to disclose share repurchase information annually in Form 20-F, whereas the proposed new Form SR would impose a daily reporting obligation. In the SEC's rulemaking proposal, the SEC sought comment on whether the SEC should exempt all FPIs from the requirement to file a Form SR or provide for different requirements. The SEC noted that some FPIs are required to provide daily detailed disclosure in their home jurisdictions and that some FPIs file those reports under Form 6-K. Therefore, companies should monitor the progress of these proposed rules and the requirements introduced by any final rulemaking, including interactions with any home jurisdiction rules and non-US stock exchange disclosure requirements.

For more information on the proposed rules, see "SEC proposes new disclosure rules for share repurchases".

SEC filing fees and filing fee disclosures
As announced by the SEC on 23 August 2021, commencing on 1 October 2021 through 30 September 2022, the SEC filing fee for registration statements decreased to $92.70 per $1 million of securities registered.

In addition, the SEC is also amending most of its fee-bearing forms to require filers to present the information required for filing fee calculations in a separate exhibit structured in inline extensible business reporting language. These amendments generally became effective on 31 January 2022.

For further information on this topic please contact Richard Alsop, Roberta Cherman, Marwa Elborai or Masahisa Ikeda at Shearman & Sterling by telephone (+1 212 848 4000) or email ([email protected], [email protected], [email protected] or [email protected]). The Shearman & Sterling LLP website can be accessed at