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The SEC may loosen deregistration requirements for foreign companies as a way to attract more overseas issuers. But the move could backfire.
Sarah Johnson, CFO.com | US
December 7, 2006
The Securities and Exchange Commission may make it easier for foreign companies to pull out of the U.S. capital markets by relaxing its requirements for deregistering with the regulator. The SEC will consider its staff's recommendation to change deregistration rules next week at its open meeting scheduled for December 13.
The staff is suggesting that the SEC base a foreign company's right to deregistration on the stock's trading volume in the U.S., rather than its shareholder headcount. That threshold, currently set at 300, is too low to track effectively, say many foreign companies.
The timing of the proposal is interesting, as the U.S. corporate regulatory regime has been under attack of late, particularly regarding the alleged dampening effect the Sarbanes-Oxley Act has had on attracting foreign issuers to U.S. exchanges. In fact, rollback of Sarbox's most contentious provision, Section 404, is also on the meeting's agenda, along with its sister auditing standard, the Public Company Accounting Oversight Board's AS2. Section 404 requires management to thoroughly assess and report on a company's internal controls processes, and has been criticized as being too costly and time consuming. Meanwhile, financial executives have denounced AS2 for encouraging auditors to be overly conservative in their assessment of management's processes.
Wednesday's meeting also will take place against a backdrop of a report issued last week by the Committee on Capital Markets Regulation (CCMR), a group that is backed by Treasury Secretary Henry Paulson. The report has attracted a great deal of press coverage for its conclusion that tough regulations are hurting the nation's global competitiveness and pushing foreign capital outside of U.S. borders.
The SEC staff is presenting the deregistration proposal as a strategy to help bring foreign securities into the marketplace. But the proposal could have the opposite effect. Indeed, lenient deregistration rules may give companies that detest Section 404 rules the chance to flee the U.S. market. "I think there are some foreign companies that want to leave," Robert Pozen, chairman of MFS Investment Management, told CFO.com. "If the rules changed, I think they'd take advantage."
Foreign companies and the CCMR claim that the deregistration process is "onerous." To be sure, "as long as foreign companies cannot obtain easy exits from the U.S. capital market, they will be less likely to come here in the first place," wrote the report authors, who include academics and business professional, as well as Donald Evans, a former Bush Administration economic adviser, and John Thornton, a former colleague of Paulson's from Goldman Sachs.
The current rules make an easy exit elusive, as foreign companies have to prove they have fewer than 300 shareholders in the U.S., a requirement observers say has turned the U.S. markets into a "roach motel"—you can check in but you can't check out. In a comment letter to the SEC, Gervais Pellissier, CFO of France Telecom, told the regulator that the current rules are a "significant obstacle" for new listings by foreign issuers. Prompted by similar complaints, the SEC proposed a year ago that it should base the deregistration threshold on both the percentage of U.S. shareholders and trading volume. However, this new "reproposal" would be based solely on trading volume.
John White, director of the SEC's division of corporate finance, believes the new proposal will make the U.S. markets more attractive for foreign companies. It will provide "a clear, consistent, easy-to-apply, and fair standard pursuant to which foreign registrants may withdraw from our capital markets and end their obligations to comply with our rules," he said in a press release. The SEC staff is requesting that the commission put the proposal through a 30-day comment period and consider final rules in the first quarter of 2007.
While the SEC said its new proposal would benefit investors, one observer believes that the commission should make another tweak to make that true. Pozen says the there should be two sets of requirements, one for existing foreign issuers, and one for new entrants. In that way, investors looking to invest in new entrants would know that the companies could pull out within 90 days, as provided by the new rules, but shareholders of existing foreign companies would not face the same risk.
Since required to be Sarbox-compliant, officials at foreign issuers have lamented about the cost of Section 404. Last year, the CFO of Lastminute.com, a leisure and travel group that operates mainly in Europe, admitted to CFO magazine that his company left Nasdaq and deregistered because of U.S. regulatory expenses. "The cost of maintaining the U.S. listing compared with the number of U.S. shareholders just didn't make sense," said David Howell.
Others are either waiting for more lax deregistration requirements or trying to see if they can be exempt from Sarbox. Lars Dahlgren, senior vice president and CFO of Swedish Match AB, made that request in a comment letter to the SEC, saying that because his company is private, it should be excluded. "We believe there is a direct connection between deregistration and the Sarbanes-Oxley Act, and in particular Section 404, because the costs and burdens of Section 404 are a substantial factor leading foreign private issuers to consider deregistration," he wrote.
Other CFOs of foreign companies mentioned that trading volume could be an effective benchmark. They recommended that the decades-old guideline of having 300 U.S. shareholders be updated to 1,000 or 3,000, and institutional investors should be excluded from the final count. A letter signed by finance chiefs from companies based in the United Kingdom, Sweden, German, Norway and other nations, said 300 shareholders typically represents less than 1 percent of the total number of a company's investors.
On the other hand, John Stanhope, CFO of Australia's Telstra of Melbourne, supports the current threshold of 300 shareholders, but said a test of the dollar amount of the issuer's assets is irrelevant and would further make exiting the SEC's hold difficult. Telstra has since said it plans to deregister, according to its comment letter.