Securities Law Alert: April 16, 2004

SEC Adopts Foreign Bank Insider Loan Exemption

On April 13, 2004, the SEC adopted a rule that will exempt foreign banks from the insider lending prohibitions of Section 13(k) of the Exchange Act. Section 13(k) prohibits foreign and domestic issuers from directly or indirectly extending credit or arranging for the extension of credit to or for any director or executive officer unless certain exemptions are met. Under Section 13(k), certain insider loans are permitted if the issuer is a bank or other depository institution that is insured under the Federal Deposit Insurance Act. Currently, foreign banks are not eligible for this exemption, and the new rule, Rule 13(k)-1, is intended to make the treatment of foreign banks equivalent to domestic banks under Section 13(k).

The new exemption provides that insider loans by a foreign bank issuer and loans to an insider of an issuer that is a parent or affiliate of the foreign bank are exempt from Section 13(k) if

• the foreign bank's home jurisdiction requires the bank to insure its deposits or be subject to guarantees or protections, or the Board of Governors of the Federal Reserve System has determined that the foreign bank is subject to comprehensive supervision or regulation by the bank's supervisor in its home jurisdiction; and
• the loan by the foreign bank to any of its directors or executive officers or those of its parent or other affiliate
• • is substantially on the same terms as other transactions by the foreign bank with non insiders;
  • is pursuant to a benefit or compensation program that is widely available to the employees or affiliates of the foreign bank and does not give preference to the insider; or
  • has received the express approval of the bank's supervisor in its home jurisdiction.

In addition, the SEC adopted an amendment to Form 20-F that will require foreign bank issuers to provide substantially the same disclosure regarding loans to insiders as is required for domestic bank issuers under Regulation S-K.

The exemption will be effective upon its publication in the Federal Register, and the amendment to Form 20-F will take effect thirty days after its publication in the Federal Register. The full text of the SEC's detailed release regarding Rule 13(k)-1 will be posted on the SEC's web site (www.sec.gov) in the near future.

SEC Proposes Rules Related to Public Shell Companies

On April 13, 2004, the SEC also voted to publish for comment proposed rule and form amendments relating to public shell companies. Such rule and form amendments would

• prohibit public shell companies from using Form S-8, the form public companies use to register securities in connection with employee benefit plans under the Securities Act; and
• require public shell companies to report on Form 8-K when they cease to be shell companies and to include disclosure of the same type of information that such companies would be required to file in order to register a class of securities under the Exchange Act (the "34 Act Registration Information").

The proposed amendments would allow a company that becomes an operating company to use a Form S-8 to register securities sixty days after it has filed a Form 8-K that includes the 34 Act Registration Information.

Under the proposals, a "shell company" would be defined as a company with no or nominal operations, and with no or nominal assets or assets consisting solely of cash and cash equivalents. While this definition would include foreign private shell companies, the release solicits comments on the manner in which these companies should report the information that would otherwise be reportable by a domestic shell company on a Form 8-K.

The SEC proposed the amendments to ensure that investors in shell companies that become operating companies will be afforded access to the same kind of information as is available to public companies with continuing operations on a timely basis. In addition, because Form S-8 is effective automatically upon filing, these proposed amendments guard against the frequent misuse of the form by public shell companies that are not operating companies with employees to register shares – further protecting investors by deterring fraud in the securities markets and the investment community.

The SEC indicated that its actions were motivated in part by a perceived increased interest in going public through the use of reverse mergers involving public shell companies.

Comments on the proposed amendments are due within forty-five days after publication in the Federal Register.