Speech by SEC Commissioner:
Remarks at the International Law Association's 72nd Biannual Conference
Commissioner Paul S. Atkins
U.S. Securities and Exchange Commission
June 7, 2006
Thank you, Ed, for that kind introduction. I am very happy to be present today among such distinguished co-panelists, and with such a terrific audience here in Canada. I always look forward to visiting our "neighbor to the north." Our two countries share so much in common the NHL, Celine Dion, and, of late, lawsuits against our public company accounting boards! Before I begin, I am required to tell you that the views I express here are my own and do not necessarily represent those of the Securities and Exchange Commission or my fellow commissioners.
I am looking forward to discussing with my fellow panelists the issue of comity or the unfortunate lack thereof in international securities regulation. One definition of comity is "an atmosphere of social harmony." It is with great regret that I tell you as a Commissioner of the United States Securities and Exchange Commission, I have absolutely no influence over this brand of comity. But, it sure sounds nice!
Another definition of comity is, of course, "the informal and voluntary recognition by courts of one jurisdiction of the laws and judicial decisions of another." Most interpret this latter definition to include the rules and decisions of international regulators in addition to judicial matters. With the internationalization of the securities markets, the issue of comity is becoming increasingly important to the S.E.C.
Unfortunately, it seems especially to outsiders that the S.E.C.'s viewpoint too often is to recognize, but at the same time either ignore or trample upon, the laws and decisions of our international counterparts. Indeed, the S.E.C. just settled a million dollar enforcement case against the largest transfer agent in Canada because it like every other major Canadian transfer agent failed to comply with the highly complex S.E.C. rules regarding transfer agent registration. Mind you, the requirement to register can be triggered, unbeknownst to the transfer agent, simply when a foreign transfer agent's issuer client registers its securities in the U.S.
I understand that registration is considered a bedrock of regulatory oversight, but I firmly believe that million dollar enforcement actions are not the only means to put the world on notice of our registration requirements. Is it not possible for the Commission to engage in cooperative, prudential regulation with regulated entities (both properly registered and unwittingly not) and our foreign regulatory counterparts to ensure that our registration requirements are recognized and enforced? As John Lennon wrote, "You may say that I'm a dreamer." I hope I'm not the only one.1
Even when foreign market participants are aware of the S.E.C.'s registration requirements, we don't exactly provide for them the most hospitable environment. For example, our Rule 15a-6 allows foreign broker-dealers to transact certain types of business in the U.S. without registering with the S.E.C. as a broker-dealer. This sounds great in theory, but the conditions almost swallow the relief. I understand that certain Canadian provinces have similar restrictions on foreign broker-dealers.
Rule 15a-6 and its progeny of staff interpretations allow foreign broker-dealers to, among other things, effect unsolicited transactions with U.S. investors, and to engage in transactions with certain U.S. institutional investors when a U.S. broker-dealer is involved as a "chaperone." Given the S.E.C. staff's far-reaching interpretations of "solicitation" and the burden of the chaperoning requirement, it is easy to understand why there have been cries for relief by foreign broker-dealers. It has been seventeen years since Rule 15a-6 was promulgated, and the Commission should take a hard look at this issue.
In a time when the New York Stock Exchange is acquiring Euronext, when NASDAQ owns more than 25% of the London Stock Exchange, and when the New York Mercantile Exchange and the Toronto Stock Exchange are rumored to be on the verge of an alliance, it is critical that we identify and remove unnecessary burdens to entry in both the U.S. and Canadian capital markets. It will be interesting to see if the recent movement towards nationalized securities regulation in Canada brings clarity and openness for non-Canadian market participants. But, sitting in my glass house at the S.E.C., I can tell you that the presence of a national regulator does not necessarily ensure rational actions, especially in the ever-changing financial services industry.
Another major comity issue facing the S.E.C. is the export of overly burdensome internal control requirements for U.S. listed issuers. I am greatly concerned that those requirements, along with other S.E.C. regulations, may be discouraging foreign investment in the U.S. A few weeks ago, the British firm Cable & Wireless issued a press release announcing that it is requiring all U.S. shareholders with fewer than 100,000 shares to dispose of their holdings. This decision implemented an amendment to the company's Articles of Association that the shareholders approved in December by 97.8% of the votes cast.2 In fact, it is not a voluntary provision. If American shareholders do not sell, then the company will sell the shares on their behalf! Apparently, the company will then be able to terminate the registration of its shares with the S.E.C. because it will have fewer than 300 U.S. shareholders. The Financial Times quite rightly described this move as an "innovative" tactic but one that is clearly not in the interest of American shareholders.3
This action follows on reports of other companies which have elected not to register their securities in the United States. Is there, in fact, a rising trend for companies not to register in the U.S.? If so, it is a trend that is certainly not welcome from my perspective.
According to the Wall Street Journal, up until the year 2000 nine out of every 10 dollars raised by foreign companies through new stock listings were raised in New York. But, by 2005, the numbers had reversed and now nine out of every 10 dollars are raised outside of America.4
The reasons why companies may choose not to register and list their securities in the United States are multifaceted. For example, increased costs and risks associated with the implementation of the Sarbanes-Oxley legislation passed in 2002 are a significant contributor to both the reality and perception of increased burdens and expense.
One provision that is particularly problematic is Section 404, which requires management to complete an annual internal control report and requires the company's auditor to attest to, and report on, management's assessment. Although Section 404's objectives may be laudable, its implementation has been, quite frankly, a train wreck. The Public Company Accounting Oversight Board's 300-page Auditing Standard No. 2, which governs the auditor attestation, has been the cause of most of the trouble. Fortunately, in the aftermath of last month's Section 404 Roundtable at the S.E.C., both the Commission and the PCAOB have pledged to take steps to streamline Section 404 implementation.
In this regard, I was greatly interested in the recent decision by the Canadian Securities Administrators to not implement Multilateral Instrument 52-111 the Canadian equivalent of Section 404. By proposing CEO and CFO certification of internal controls instead of mandating auditor attestations, the CSA has recognized and avoided in its own way the undue burden that U.S. registered issuers currently face under Section 404. That is certainly an example of prudential regulation. Is it one that we in the United States should emulate? The weighing of benefits versus burdens is part of the process that we at the S.E.C. must undertake over the coming months of rule proposals and notice-and-comment. I encourage your active participation, no matter what your nationality. We can certainly learn from your insights and experience.