FINANCIAL TIMES: Long arm of the US regulator: “After corporate scandals and onerous new corporate governance rules, the US Securities and Exchange Commission is showing its teeth far beyond American shores.”: “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” (ShellNews.net) 10 March 05

By Bob Sherwood

Published: March 10 2005

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?"