If You Love a Company, Set It Free?

The SEC may loosen deregistration requirements for foreign companies as a way to attract more overseas issuers. But the move could backfire.

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.


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