Back in September, we learned about a provision in the then-proposed Senate bill, National Defense Authorization Act for Fiscal Year 2024, which would make insiders of foreign private issuers subject to Section 16 by eliminating the longstanding exemption for securities registered by FPIs set forth in Exchange Act Rule 3a12-3. (See this PubCo post.) While the provision was included in the Senate version of the bill, it was apparently not included in the final House version, which meant that the bill was sent to conference to resolve differences. Fortunately, the folks at Section16.net Blog, who ferreted out the provision originally, have been on top of this issue and now report that this provision was ultimately not included in the final bill: the Senate “receded,” as the conference report indicates. Whether this provision, or another one like it, reappears in another bill next year remains to be seen.
Happy holidays!
Why eliminate the exemption, you ask? Section 16.net reports that the impetus for the bill was an April 2022 paper entitled “Holding Foreign Insiders Accountable” by several academics, including former SEC Commissioner Robert Jackson. The paper looked at trading by insiders of U.S.-listed, foreign-domiciled companies, and found that “insider sales at foreign firms are highly opportunistic—and far more so than those of their American counterparts. After insiders at Russia-domiciled, U.S.-listed firms sell shares, their stock prices decline, on average, by 26%; after insiders at China-domiciled firms trading on U.S. exchanges sell, their stock prices decline by 21%. And insiders at foreign-domiciled firms sell at scale: the average stock sale at the Chinese firms we study is worth more than $18 million. This aggressive selling prior to large stock-price declines allows insiders at foreign companies listed on U.S. exchanges to avoid considerable losses.” The authors’ findings “raise the troubling prospect that insiders at foreign firms listed in the U.S. are shielded from the well-known market discipline that accompanies the timely disclosure of such trading required of their American counterparts.” To address that issue, the authors suggested that, if “foreign firms are to be permitted to raise capital from American investors, their insiders’ trading should be subject to the same level of transparency as insiders at American companies.”
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. The Holding Foreign Insiders Accountable Act was then folded into the Senate version of 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 cited 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.” The two Senators expanded on their views in this WSJ article. It’s worth noting that, while the sponsors referred to the need for disclosure of trades, it also appears that the proposed amendment would have made insiders of FPIs subject to the short-swing profit disgorgement provisions of Section 16(b) as well.
