[A-List] Regulatory Imperialism

["Sabri Oncu" <soncu@xxxxxxxxxxx>]

By the looks of it, objections to the US hegemony are getting serious.

Sabri

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Financial Times, March 10, 2005
Long arm of the US regulator: 
CORPORATE GOVERNANCE: 

Some overseas companies feel trapped as the US Securities and Exchange
Commission flexes its muscles far from home

It has been called "regulatory imperialism". After corporate scandals and
onerous new corporate governance rules, the US Securities and Exchange
Commission is showing its teeth far beyond American shores.

>From South and Central America to Europe, the US reporting and control
rules, many stemming from the Sarbanes-Oxley act, are giving executives
sleepless nights. There are signs that the SEC is paying some heed to
foreign companies' concerns. But lawyers warn that escaping the "lobster
pot" of US regulations will prove impossible for most large corporations.

At a recent London conference on SEC regulation outside the US, Cynthia
Glassman, SEC commissioner, insisted the regulator was listening to the
concerns of foreign issuers about the increasing compliance burden. "We
should pay serious attention to the comments we receive and weigh the
evidence carefully in making decisions on whether to make a rule, change a
rule or go in a different direction." 

However, SEC investigations into TV Azteca in Mexico, Ahold and Royal
Dutch/Shell in the Netherlands, Spiegel in Germany and Vivendi in France,
among others, have left executives in no doubt that the US regulator
recognises no geographical boundaries where US shareholder interests are
perceived to be at risk. And many businesses remain highly sceptical that
their concerns are being heard in Washington.

Joost Italianer, a regulatory and financial fraud specialist at law firm
Nauta Dutilh in Amsterdam, says there is now a greater fear of the SEC than
of domestic authorities. "One interesting development I see in the
Netherlands is that Dutch prosecutors have been complaining that Dutch CEOs
fear the SEC more than the public prosecutors. One told me recently: 'I
don't want to get into a legal arms race with the SEC.' "

In addition, the extra costs of complying with US rules have made many
European companies feel "they are no longer on a level playing field", he
adds.

Any company with a US listing is subject to the Sarbanes-Oxley requirements,
but the SEC said last week it would give non-US companies an extra year to
comply with one of the most controversial parts of the act. Section 404
requires companies to report on their internal controls and auditors to pass
judgment on managements' assessments and the effectiveness of the controls.
Large and medium-sized US companies, preparing the first annual reports that
will comply with section 404, have complained bitterly about the costs
involved.

The weight of concerns has persuaded the SEC to give foreign companies until
their reports for fiscal years ending by July 15 2006 to comply. While the
delay will be welcome, the fundamental concerns remain. Ms Glassman told the
London conference that she too had doubts about section 404's effectiveness:
"I have been concerned . . . that section 404 would become an expensive,
short-term, check-the-box exercise, taking focus away from management and
moving it to internal and external auditors."

Ricardo Salinas Pliego, chairman of TV Azteca, the Mexican broadcaster,
railed against the SEC's reach in January: "It is absurd that the SEC is
using a Mexican company and Mexican citizens to try to impose US regulations
outside its borders."

Some other executives may have sympathy for his view, but lawyers warn that
it is pointless to antagonise the SEC. Rick Mitchell, partner at US law firm
McDermott, Will & Emery in London, says: "The approach is a little bit
imperialistic. But the SEC's answer is: 'We have the best and most liquid
markets in the world and if you want access to them you have to pay to
play.' It is scary. But then it does focus the attention dramatically."

Mr Italianer says the importance of co-operating fully with the SEC was
demonstrated by the recent settlement of the Ahold investigation with no
penalty. That was a message from the SEC, in effect telling European
companies: "We have very sharp teeth but if you co-operate we will not need
to use them."

One of the problems for European companies is that they "don't always
precisely know what they are getting themselves into" in terms of US
obligations, says Mr Mitchell. He has advised a German company that is
considering acquiring a US business that has to make its first internal
control report this year. That would potentially mean the German company
taking on liability for the report even though it has no control over it or
concept of the risks involved.

As the compliance burden mounts, more and more foreign companies are seeking
to drop their US listing and escape the clutches of the SEC. For example,
mmO2, the mobile phone company, says it plans to delist from the New York
Stock Exchange and dissolve its American depository receipts programme as
part of a wider corporate reorganisation because the cost of registration
with the SEC was disproportionate to the benefits. ITV is also aiming to
delist in the US.

But it is not as simple as many imagine. Mr Mitchell says: "I have received
countless inquiries about the possibility of getting out (of an NYSE
listing). People ask me whether it will be hard for them to delist in the
US. I tell them delisting is easy. But having delisted, companies still have
virtually all of the obligations they had before."

The problem is that simply delisting from the US stock markets does not
deregister the company with the SEC. Companies that have more than 300 US
shareholders must still file reports with the SEC even if they have
delisted, while doing business in the US can also bring companies into the
SEC's realm. In determining the number of US shareholders, a company must
look past brokers and banks to the number of underlying individual
shareholder accounts. Getting that number below 300 can be headache, bearing
in mind the potential cost and the need to avoid legal disputes with
affected shareholders.

Ms Glassman acknowledges that "anecdotally, there seems to be more interest
in delisting", which is why the SEC is considering making it easier for
foreign companies to deregister. William Donaldson, SEC chairman, told a
London audience earlier this year: "We should seek a solution that will
preserve investor protections without inappropriately designing the US
capital market as one with no exit." Many will be watching with interest.

Mr Mitchell says that among the companies looking to deregister are many
telecoms groups that are not as global as they seemed during the sector's
boom a few years ago and mid-cap companies that are evaluating their
position more honestly than a few years ago. If companies are not going to
raise capital in the US or use their US shares as acquisition capital, why
have a US listing and incur the compliance costs and hassles that go with
it? Mr Italianer says that argument weighs even more heavily for companies
that do little business in the US.

Of course, it is possible, if time-consuming and expensive, to cut the
number of US shareholders to below 300 and jump through all the hoops needed
to deregister. But Mr Mitchell says companies should beware of the message
that sends out: "Do you really want to tell investors you are spending
millions of pounds to enable you to weaken your corporate governance
standards?"