SEC to Propose Liberalized Foreign Private Issuer Deregistration Rule

New test, based on U.S. trading volume, appears consistent with 2004 proposal by European organizations and Cleary Gottlieb

The U.S. Securities and Exchange Commission today announced that it intends to propose a revised foreign private issuer deregistration rule at its open meeting scheduled for December 13, 2006. The new proposal would allow foreign private issuers to terminate SEC registration when their U.S. trading volume is below a threshold that will be specified in the rule proposal.

Press reports have indicated that the threshold may be 5%. If so, the revised rule would be consistent with a proposal made by a group of European organizations, with the support of Cleary Gottlieb, in February 2004.

The SEC’s initial rule proposal, made in December 2005, would have allowed foreign private issuers to deregister using a test based in part on the percentage of their shares held in the United States, and in part on trading volume (for the largest companies). The European organizations and Cleary Gottlieb supported this proposal, but suggested that the SEC revise the tests, which would have allowed only a few European companies to deregister (fewer than one in ten large companies included in a February 2006 study). The new SEC proposal, if it is in fact based on a 5% U.S. trading volume test, would appear to address this concern.

The SEC announced that the modified rule will be re-proposed for further comment, rather than adopted, because the SEC had previously stated that it was not in favor of a trading volume test when it released the December 2005 proposal. At the same time, the SEC appears to be committed to moving quickly, as it announced its intention to limit the comment period to 30 days, and that it hopes to adopt a final rule in the first quarter of 2007.

Whether the SEC’s new rule will in fact provide a practical mechanism for companies to exit the U.S. market when they find that the costs of U.S. registration outweigh the benefits will depend on the details of the new proposal, which should be available shortly after the December 13 meeting.

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