Burden May Ease For Foreign Filers, But Not Standards

Non-U.S. companies may get some relief on the deadlines and reporting redundancies for complying with new U.S. requirements, but no leniency on the requirements themselves. That’s the message from William H. Donaldson, chairman of the U.S. Securities and Exchange Commission in a recent speech at the London School of Economics and Political Science.

Donaldson

Donaldson said the SEC staff is considering delaying the effective day for non-U.S. companies to certify the effectiveness of their internal controls over financial reporting—the Section 404 requirements of Sarbanes-Oxley—much as the effective date has already been extended for smaller issuers. He also suggested the SEC may consider making it easier for foreign companies to delist and exit U.S. markets.

Tensions in Europe have escalated in recent months, in part because of Sarbanes-Oxley in the U.S., but also because European companies are in the midst of sweeping accounting reforms as the European Union institutes International Financial Reporting Standards in 2005. European companies and organizations have started pushing back, saying the reporting burden associated with Sarbanes-Oxley is causing companies to question the value of their U.S. listings.

Delist, If You Can

Edrupt

Organizations like The Confederation of British Industry have openly lobbied the SEC to lighten the requirements imposed on foreign companies. Clive Edrupt, deputy head of CBI’s Company and Commercial Law Group, acknowledged CBI members are looking for a way out. “We’ve got members with small numbers of U.S. shareholders who are investigating delisting,” he said.

It’s easier said than done, however, even by SEC’s own admission. SEC officials have acknowledged that the antiquated rules pre-date modern globalism. “I expect the SEC to consider whether there should be a new approach to the deregistration process for foreign private issuers if they do not feel prepared to meet the U.S. requirements,” Donaldson said. “We should seek a solution that will preserve investor protections without inappropriately designing the U.S. capital market as one with no exit.”

If such option becomes more easily available, will non-U.S. companies truly pack up their listings and leave the U.S. capital markets? Edrupt acknowledged that most companies recognize the importance of pressing forward with compliance. “If you’re listed in the United States, you’ve got to comply with the rules,” he said. “It’s the cost of doing business and having access to capital in the U.S.”

Johansson

Leif Johansson, president and CEO of Volvo Group, said in a recent PricewaterhouseCoopers release, that Volvo has spent time and money on compliance in the past few years that it could not sustain indefinitely. “But, in general, I think the effort has been necessary and worth it,” he said. “I see compliance as a stamp of quality. Investors want to know that we are a compliant company.”

Johansson acknowledged considerable pushback on Sarbanes-Oxley. “I think a lot of it is because there appears to be too much form over substance,” he said. “And we’ve had that same issue before in areas like quality and environmental management.”

Donaldson acknowledged the “seismic change” that the conversion to IFRS is creating for many European companies and said the SEC is considering ways it can streamline the reporting processes to eliminate redundancies and contradictions. Yet he remained unwavering on the essence of the requirements and underscored the importance of the U.S. markets to the world.

“It is easy for an individual issuer to look at the cost of compliance with U.S. federal securities laws and balk,” he said. “But the cost of capital also comes with benefits. U.S. capital markets are deep and liquid. Nearly half of all the world’s equity shares, by market capitalization, trade in the United States.”