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.