Key Takeaways:

  • Under pending legislation, directors, officers and 10% shareholders of foreign private issuers would be required to file public stock ownership reports with the SEC and would be subject to liability for “short-swing” profits earned from trading in registered equity securities.
  • Foreign private issuers would likely bear much of the compliance burden associated with these requirements.
  • The legislation is not final and, if adopted, would require the SEC to draft implementation rules.

On September 19, 2023, the U.S. House of Representatives and U.S. Senate began the process to resolve differences between their respective versions of the National Defense Authorization Act for Fiscal Year 2024 (the “NDAA”). The NDAA primarily concerns defense and national security matters, but the Senate version of the NDAA repeals the foreign private issuer (“FPI”) exemption from Section 16 of the Securities Exchange Act of 1934 (“Section 16”). FPIs are companies organized and principally based outside of the U.S. that list their securities on U.S. stock exchanges. If the repeal of the FPI exemption ultimately becomes law, this would represent a major shift in how FPIs and their directors, officers and 10% shareholders (collectively, “Insiders”) are treated under Section 16 and would impose a substantial new compliance burden on FPIs and their Insiders.

Securities and Exchange Commission (“SEC”) Rule 3a12-3 has exempted FPIs and their Insiders from Section 16 for decades. Section 16 requires Insiders of a U.S. listed company to file reports with the SEC to disclose transactions in company securities. The disclosure requirement is broad and can cover open market transactions, equity compensation award grants, exercises of derivative securities and transactions by certain family members. The reporting deadline is two business days after a transaction and a company must disclose in its annual report whether any Insider was late in filing a Section 16 report. Companies and Insiders may be subject to SEC enforcement actions for failing to file reports required by Section 16. In addition to these disclosure requirements, Section 16 also imposes “short-swing” profit liability on Insiders: subject to several exemptions, including for equity compensation transactions approved by a company’s board of directors or certain board committees, any profit realized by an Insider from any purchase and sale, or any sale and purchase, of any registered equity security of the company within a six month period is recoverable by the company. Section 16 also grants shareholders the right to sue to recover any “short-swing” profits on the company's behalf and plaintiffs often bring these suits (plaintiffs may also recover attorney fees from the company). If the NDAA is enacted as currently proposed by the Senate, FPIs and Insiders would have to comply with both the reporting and “short-swing” profit liability provisions of Section 16.

The NDAA has not been signed into law and the FPI exemption remains in place for the time being. As currently drafted, the NDAA would require the SEC to propose and adopt rules to repeal the FPI exemption within 90 days of enactment. However, the timing of the SEC’s rulemaking process can vary.