Speech by SEC Commissioner:
Comments on Final Deregistration Rules at the SEC Open Meeting
Commissioner Paul S. Atkins
U.S. Securities and Exchange Commission
March 21, 2007
Thank you, Mr. Chairman. I want to start by once again congratulating and thanking John White, Paul Dudek, Mauri Osheroff, and Elliot Staffin in the Division of Corporation Finance for finalizing this groundbreaking rulemaking process. I would also like to thank the Office of Economic Analysis, the Office of the General Counsel, and the Office of International Affairs for their hard work on this rulemaking.
John, I said this in December when we re-proposed the deregistration rules, and I will repeat it now -- you and your staff have exhibited fantastic creativity and flexibility throughout this process. I am particularly pleased at the lengths to which we have gone in addressing the numerous comments we received. This process has been a shining example of how the SEC should proceed in ALL of its rulemakings. As you can tell, I am very pleased!
And, John, I would like to point out for your benefit that if English feudal law still prevailed, today would mark your freedom from serfdom to your old law firm, since you have been gone from there for a year and a day. Thus, some might say that it is a fitting day for today's rulemaking.
The finalization of this rulemaking is another significant, tangible step in the SEC's evolving perception of its role in a globalizing marketplace. By adopting these rule amendments today, we are remedying a problem that has been festering for decades. Our former deregistration rules, which required a nose-count of U.S. investors to determine if registration was required, was so beloved by our foreign brethren that it gave rise to such kindly monikers as "hotel California," or the "roach motel" or - one of my own creations -- the "Venus flytrap." Surely none of us at the SEC want to perpetuate such ill-famed requirements. And so it is with great relief that we are adopting much more flexible, realistic, and forward-looking rules with the new Exchange Act Rule 12h-6. Rule 12h-6 will measure trading volume instead of the number of U.S. investors. Although I continue to believe that measuring the percentage of a foreign private issuer's equity held by U.S. investors would be workable -- or even preferable -- if we excluded Qualified Institutional Buyers, the 12h-6 volume test is an excellent alternative.
Measuring U.S. trading volume to determine if registration is required simply makes sense - we should be weighing the domestic U.S. investor interest in an issuer, and should not be apply our laws to purely foreign transactions. This is consistent with the Commission's long-held "territorial approach" to regulation. Over the last 20 years, through Rule 144A, Reg. S, Rule 15a-6, and other rulemakings, the Commission has steadfastly proclaimed that we should not apply our regulations to transactions occurring outside the United States.
There has been a lot of talk by a lot of groups lately about the competitiveness of the U.S. capital markets. One consistent theme in all of those discussions is that the U.S. needs to pay heed to the strength and growth of foreign markets, and U.S. regulators must ensure that our regulatory policies allow the U.S. markets to adapt to the changing face of capital formation. As I see it, this is not an argument for less -- or "light touch" -- regulation -- it is an argument for smart regulation. What we are doing today is an example of smart regulation, and I hope it is the start of a trend.
Recently, some SEC senior staff have publicly discussed possible means of eliminating the barriers that currently prohibit foreign exchanges from placing trading screens in the U.S. At the same time, E*Trade recently announced that it now offers U.S. customers direct access to foreign securities through its overseas affiliates. It seems to me that if we allow foreign trading screens, or if the E*Trade foreign securities model succeeds and is replicated among other broker-dealers, our nose-counting methodology will put unwary foreign issuers on a collision course with our registration requirements. We cannot perpetuate a trap for the unwary on a global scale.
With that in mind, I have just a few questions:
- In light of these proposed and actual market structure changes raised in various fora by SEC senior staff, do we have plans to revisit the parameters of Rule 12g3-2(b)? How do we address the trap for the unwary foreign private issuer who, through no affirmative actions of its own, finds that somehow it has more than 500 U.S. shareholders and thus has run afoul of our registration requirements?
- What did commenters say about the 5% threshold - did they think the number too high or too low?
- I see that we listened to commenters who wanted us to eliminate trading in convertible debt and equity-linked securities from the volume test, presumably because it would be difficult to measure. That makes sense to me at this point, but is this a potential loophole that the Commission should be concerned about?
- Although we changed the volume test to look at worldwide trading volume instead of primary market volume, we retained the primary market condition to 12h-6 to ensure that there is an active foreign market for U.S. investors to turn to after deregistration. Did we get comment on whether the definition of "Primary Market" gives us sufficient flexibility to adapt to changes in foreign market structures - for example, the impending, post-MiFID, proliferation of alternative markets in Europe?