S.E.C. to Loosen Rules on Many Companies
By Floyd Norris New
Thursday, December 15, 2005
In strong moves to reduce the burden of securities
regulations, the Securities and Exchange Commission proposed
rules yesterday to make it easier for foreign companies to
get out from under such regulations, while an advisory panel
put forward guidelines that would exempt 80 percent of
American companies from having to comply fully with the
The moves sent a signal that regulators were worried about
complaints made by many companies regarding costs.
Christopher Cox, chairman of the S.E.C., said he hoped new
rules would encourage foreign companies to list in the
United States since they would know it would be relatively
easy to leave if they chose.
The proposed rule, which could be changed after public
comments are received, stopped well short of a request by a
large group of European companies that they be able to
deregister if their trading volumes in the United States
"There are companies that have relatively low U.S. trading
volume, but relatively high U.S. ownership," said Alan
Beller, the director of the commission's division of
corporate finance, adding that those companies should remain
The recommendation on the Sarbanes-Oxley provision came from
the S.E.C.'s advisory committee on small business. It voted
to ask the commission to allow most companies with market
values of less than $700 million to avoid having their
internal controls certified by auditors.
The vote was 18 to 1, with the dissenting member, Kurt
Schacht, the executive director of the CFA Centre for
Financial Market Integrity, saying, "It is clear that we
need to do something for small companies, but giving them a
pass on any verification and oversight of internal controls
will come back to haunt us."
Backers of the proposal said the costs of compliance were
too high. "We value internal controls strongly," James C.
Thyen, chief executive of
Kimball International and co-chairman of the advisory
committee, said in a telephone interview. "We see the
goodness in it, but we think there has to be some
proportionality in costs versus benefits." Under the
proposal, his company would no longer need to have its
Regarding foreign companies, the proposed S.E.C. rule would
allow them to leave if less than 5 percent of the trading
volume of their stock takes place in United States markets,
but only if less than 10 percent of the shares are owned by
residents. If the figure is less than 5 percent, the company
may leave the market no matter how large the volume.
Current S.E.C. rules make it very difficult for a company
that chooses to register its securities in the United States
to get out of the market. American officials have justified
that by saying that investors who buy securities with the
protections afforded by United States registration deserve
to keep the protections while they own the securities.
Companies that took advantage of the new rule would have to
publish financial statements in English and make them
available on the Internet, the S.E.C. said.
S.E.C. officials said the rule change would end a major
source of friction with foreign issuers. "It removes the
image of shackles" that keep companies in the United States
when they want to leave, said Raul Campos, a commissioner.
The concerns of foreign companies grew after the passage of
the Sarbanes-Oxley Act in 2002, which requires companies
with securities registered in the United States to have
their internal controls audited. That requirement has been
delayed for foreign issuers and for smaller American
companies after it proved to be more expensive than
The proposal from the small-business group went well beyond
what some had anticipated. While all American companies with
market values of more than $75 million have complied with
Section 404 of the act, which requires managements to assess
internal controls and auditors to report on whether the
controls are adequate, the S.E.C. delayed its application to
The advisory committee recommended that most companies with
market capitalizations under $100 million be exempted
totally. And it recommended that companies with market
capitalizations of $100 million to $700 million not face
audits of internal controls. Some companies with large
revenues but low market values would still be required to
comply with the act.
Between them, the changes would ease or remove the Section
404 requirements for about 80 percent of public companies,
although those companies together account for only about 6
percent of the market value of American companies.
Any such proposal could not take effect unless approved by
the S.E.C. A commission spokesman declined to comment.