Capital Markets

SEC Aims to Fix “Hotel California” Image

Hoping to relax foreign company fears that listing in the U.S. means they can never leave, SEC commissioners Wednesday proposed rules to make it ea...
Sarah JohnsonDecember 13, 2006

The Securities and Exchange Commission has moved one step closer to relaxing its deregistration requirements for foreign companies. On Wednesday, the regulator’s commissioners voted to release a revised proposal that would base a foreign private company’s right to pull away from the SEC’s reporting requirements solely on its trading volume in the United States.

The SEC will release its “reproposal” for public comment over the next 30 days. The commission will then decide whether to approve the final rules in the first quarter of 2007.

The commission’s staff believes the change will encourage more foreign companies to invest in the U.S., as it could quiet critics who think leaving the SEC’s reporting regime is too difficult for foreign companies. Currently, the foreign issuers who have delisted themselves from a U.S. exchange and want to deregister from the SEC have to prove they have fewer than 300 shareholders in the U.S. Foreign companies have said that headcount is too low to track effectively.

To give foreign issuers an easier exit, the new allowance would let a company deregister if, in the previous 12 months, its average daily trading volume of securities in the U.S. did not exceed 5 percent of that same metric in its primary trading market. Using 2004 data, the SEC estimates that 28 percent of the 1,200 foreign private issuers would be eligible to deregister under the new proposal.

In comments to the SEC, many foreign companies have complained in the past that the deregistration process is “onerous,” and argued that companies were afraid to list in U.S. markets as a result. For example, Gervais Pellissier, CFO of France Telecom, told the regulator in a recent comment letter that the current rules are a “significant obstacle” for new listings by foreign issuers.

At the SEC hearing Wednesday, commissioner Paul Atkins alluded to the Hotel California, the Eagles song that included the line “You can check out any time you like, but you can never leave.”

This assumption that the U.S. capital markets has a “no exit” policy is “not the message we want to send,” echoed commissioner Kathleen Casey during the hearing.

An earlier proposal, issued last December, would have used both trading volume and the number of U.S. shareholders as thresholds for allowing a company to deregister. But many comments in response to that proposal complained that proving the residency status of investors was costlier and harder to determine for foreign companies than simply calculating trading volume.

The revised proposal, which eliminates the number of shareholders as a threshold, will modernize an outdated SEC requirement and will likely encourage more overseas companies to invest in the U.S. market, said SEC Chairman Christopher Cox.

The new proposal is more logical and principles-based, said commissioner Annette Nazareth, and uses the “cleanest and easiest” threshold compared to the SEC’s previous ideas.

Elliott Staffin, special counsel in the SEC’s international finance office, acknowledged that some foreign companies want to take their capital out of the U.S. “There are certainly some issuers that are waiting for this rule and are anxious to depart,” he said. “We will see some number of issuers depart soon after the rule becomes effective.” However, he does not expect a “mass exodus” as some observers have predicted.