SEC eases foreign groups' exit from US



By Jeremy Grant

The US on Wednesday removed one of the most frustrating regulatory burdens afflicting foreign companies with US listings by making it easier for them to escape compliance with the Sarbanes-Oxley law.

The move is part of a series taken, or under consideration, in recent months to tackle US perceptions that the country's regulatory and legal landscape is discouraging foreign investors.

The Securities and Exchange Commission passed amendments to a rule allowing foreign companies wanting to delist from a US stock exchange to deregister from the SEC more easily.

This will free them from complying with the 2002 corporate compliance law, widely blamed for adding to costs by distracting management from running their businesses.

Companies with US listings have long complained about an SEC rule which prevents a foreign company de-registering from the SEC, even after delisting from a US exchange, if it has 300 or more US shareholders.

Critics said the shareholder threshold was arbitrary, dubbing it the "Hotel California effect" - a reference to the song about a hotel where "you can check out any time but you can never leave".

The amendment allows deregistration if a company can show that average daily US trading volume in its shares has been no greater than 5 per cent of its global trading volume over the previous 12-months.

The SEC estimates that 29 per cent, or about 360, of the 1,200 foreign companies with US listings fall below the five per cent threshold.

Roel Campos, an SEC commissioner, estimated that about 60 per cent of European companies could now leave. Companies falling below the threshold include Ducatti, the Italian motorcycle maker, and Genesys, a French teleconferencing group.

The SEC hopes that by making it easier for foreign companies to deregister the more likely the US will be seen as a favourable listings venue as its stock exchanges battle rivals in London and Asia.

Todd Malan, president of the Organisation for International Investment, which represents foreign companies with US listings, said: "The SEC took a big step in restoring the competitiveness of the US capital markets. This move will attract more foreign companies to US exchanges than it will encourage … to leave."

The change was timed to take affect by mid-June - just before foreign companies with US listings, and which report on a calendar basis, have to reflect in their annual reports compliance with Section 404 of Sarbox for the first time.

Section 404 requires executives to sign off on a company's internal controls and have them checked by an auditor. By delisting, such companies will now be freed from often costly 404 compliance.

Andrew Bernstein, a partner in the Paris office of law firm Cleary Gottlieb, said there would "not be a stampede" of large companies seeking to delist from the US. A US listing provided acquisition currency and the ability to award US-based employees stock options.

He said the next step in improving US competitiveness would be an SEC decision on whether to allow European companies reporting in the US to use European reporting standards without having to reconcile them with US GAAP standards.

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