U.S. Securities Update: SEC Issues New C&DI on Electronic Procedures under Regulation S, Rule 903
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SEC Issues New C&DI on Electronic Procedures under Regulation S, Rule 903

On December 8, 2016, the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) issued a new Compliance and Disclosure Interpretation number 277.05 relating to electronic procedures (the “C&DI”). The C&DI is directly relevant to the Forum’s involvement in canvassing market views on the London Stock Exchange’s implementation of electronic settlement procedures for Regulation S, Category 3 equity securities, (the “Category 3 Procedures”). Specifically, the C&DI supports a key element of the Forum's Category 3 Procedures - that the certification and agreement required under Regulation S, including Category 3, can be provided electronically.

This new C&DI was issued under Rule 903 of Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). In answer to the specific question as to whether certifications and agreements under Regulation S can be provided electronically, the SEC states:

“there are no specific requirements under Regulation S relating to the manner in which certifications and agreements are made. As a result, issuers and distributors may use electronic procedures to obtain the certifications and agreements. Such processes may be implemented by third parties and issuers and distributors may rely on those procedures to the same extent and in the same manner as when certifications and agreements are obtained in paper.” (emphasis added) 

The C&DI indicates the SEC's awareness of efforts to promote electronic trading and settlement of Regulation S, Category 3 equity securities. The issuance of the C&DI followed a number of Forum initiatives in relation to the Category 3 Procedures, including various roundtables hosted by the Forum on this topic and  the Forum’s Practising Law Institute (“PLI”) briefing on the Category 3 Procedures entitled “Regulation S, Category 3 Procedures: One-Year On” held in September 2016, which had more than 100 attendees including representatives from the SEC. The Category 3 Procedures were also referenced by Keith Higgins, the head of the SEC's Division of Corporation Finance, in his January 2016 PLI speech when he stated:

“The safe harbor procedures under Regulation S are patterned after market practices established in the late 1980s, and one could fairly ask whether they could use some updating, either in light of changes in market practice, technology or something else. For example, the safe harbor procedures under Category 3 of Regulation S for U.S. issuers offering their equity securities outside the United States stem from the era of paper-based certifications. Some trading venues, such as the London Stock Exchange, have moved forward on their own to implement changes that provide for electronic 21st century procedures.” (emphasis added) 

Furthermore, as previously announced, the Forum was “Highly Commended” for its work on the electronic settlement project at the Financial Times Innovative Lawyers Awards this year (see the Forum Update on the award here).
  • On December 8, 2016, the SEC also issued 34 additional C&DIs primarily relating to Foreign Private Issuers (“FPIs”) and Qualified Institutional Buyers (“QIBs”). An additional Forum update will follow on these shortly.
  • For more background on the Category 3 electronic settlement project, please click here.
  • The Forum’s Practical Law (September 2015) publication entitled “The Electronic Settlement of US Regulation S, Category 3 Securities Trading on the London Stock Exchange” is accessible to all Practical Law members here.
If you have any further questions regarding this please feel free to contact us.

Best regards,
Daniel Winterfeldt 
International Capital Markets, US Securities, and Diversity & Inclusion
Reed Smith LLP
Founder and Co-Chair of the Forum

Edward Bibko 
Head of Capital Markets for EMEA
Baker & McKenzie LLP
Co-Chair of the Forum
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