I don’t normally study defense appropriations bills, but the folks at thecorporatecounsel.net blog apparently do. And good thing, too. As they point out, Section 6081 of the new National Defense Authorization Act for Fiscal Year 2024 would amend Section 16(a)(1) of the Exchange Act to make insiders of foreign private issuers subject to Section 16. In effect, the amendment would eliminate the longstanding exemption from Section 16 set forth in Exchange Act Rule 3a12-3 applicable to securities registered by FPIs. In July, the bill passed the House (H.R. 2670) and then passed the Senate with amendments (S. 2226). In theory, the bill is in or headed to conference to resolve differences. However, with the reigning dysfunction in Congress and likely government shutdown, who knows when anything will happen with this bill—or whether the provision will survive?
Why eliminate the exemption, you ask? Thecorporatecounsel.net has the answer: In April, Senators John Kennedy and Chris Van Hollen—you remember this bipartisan duo from the Holding Foreign Companies Accountable Act (see this PubCo post)—introduced the Holding Foreign Insiders Accountable Act. Apparently, the Holding Foreign Insiders Accountable Act was then folded into the Defense Authorization bill this year. According to the press release, the provisions of the HFIAA were designed “to hold executives of foreign companies that are traded on U.S. stock exchanges to the same disclosure requirements that U.S.-based firms are required to follow….Currently, executives of U.S. publicly-traded companies must disclose any trades they make of their own company’s stocks to the SEC within two business days.” The bill’s sponsors cite reports in the WSJ from August last year about foreign investors avoiding billions in losses: according to Kennedy, insiders at FPIs “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.” Van Hollen added that “[a]ll 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.”
It’s worth noting that, while the sponsors refer to the need for disclosure of trades, the proposed amendment also appears to make insiders of FPIs subject to the short-swing profit disgorgement provisions of Section 16(b) as well.