By James Hamilton, J.D., LL.M.
These remarks by John White struck me as somewhat revolutionary. As part of mutual recognition of brokers and exchanges, he proposes that the SEC vet the foreign companies whose securities the foreign brokers would bring to the US market and US investors. The SEC would impose standards on those companies, including disclosure and corporate governance standards as part of the mutual recognition regime. The SEC would look at the company’s internal controls, among other things. But certainly the director’s reasoning for why the standards are needed is sound, and I like his analogizing imported cars to imported corporate securities.
As part of the incipient mutual recognition of foreign brokers and exchanges, Corporation Finance Director John White proposed standards for the foreign companies whose securities would be traded on a foreign exchange accessible by U.S. investors through a mutual recognition regime. While eventually such a regime could apply to all securities of all issuers, he said, initially the trading should be limited to the plain vanilla securities of companies with a broad market following. In that connection, the SEC would be guided by its definition of well know seasoned issuer, he said, and would use a $700 million global public float as a benchmark. In remarks before the PLI seminar on securities regulation in Europe, the director also outlined disclosure and corporate governance standards for such foreign companies.
In June 2007, the SEC hosted a roundtable on mutual recognition, a concept that would give U.S. investors greater cross-border access to foreign investment opportunities. The Commission envisions a regime permitting certain types of foreign financial intermediaries to provide services to U.S. investors under an abbreviated registration system, provided that they are supervised under a securities regulatory regime substantially comparable to that in the U.S.
In Director White’s view, issues relating to listed foreign companies are just as important as issues relating to the exchanges and brokers since the latter would become, under mutual recognition, significant conduits for bringing into the U.S. markets, and hence to U.S. investors, the securities of foreign issuers. Reasoning by analogy, the director said it would be as if the federal government regulated the companies that imported cars into the U.S., and the dealerships that sold those cars, but did not assure that the cars met emission and safety standards. A good regulator looks at the products that are offered and sold through an import arrangement, he emphasized, and with mutual recognition the product is corporate securities.
The mutual recognition model is largely premised on a determination that a home country regulatory regime provides comparable protections afforded to U.S. investors under the federal securities laws. According to the director, this determination would relate not only to brokers and exchanges, but also to the standards applicable to the listed companies involved. Issuer disclosure is one of the hallmarks of the U.S. regulatory regime and a key aspect of market transparency. Any assessment of comparability would consider a foreign jurisdiction's issuer standards with respect to financial and non-financial disclosure, as well as to corporate governance.
High quality annual disclosure documents should be available to investors free of charge over the Internet. In assessing the comparability of issuer disclosure, the SEC would consider a wide range of factors for each market and jurisdiction. No one set of standards would provide the sole template into which a foreign market would need to fit. As far as what disclosure would be considered high quality, Mr. White praised the international disclosure standards developed by IOSCO, including what he called its ``all important’’ MD&A requirement.
In the corporate governance area, the SEC would look at audit committees and internal control over financial reporting, which are widely acknowledged as being key to good governance. Recognizing the significant role that auditors play in the financial reporting system, the Commission would also look to whether a home country had in place an independent overseer of the overall activities of audit firms in that country. The SEC would also look to whether a home country enforced guidelines under which auditors' conflicts of interest are minimized, with limits on non-audit services that may undermine the integrity of the audit process.
A final standard would be whether the foreign companies treat, or whether their home country regulator or exchange requires them to treat, U.S. investors equally with home country investors, or equally with other foreign investors. This consideration could extend to diverse matters, observed the SEC official, such as whether U.S. holders receive the same mailings as other investors, whether proxies are solicited in the same manner, and whether rights offers are extended on an equal basis.