United States Securities Regulation and Foreign Private Issuers: Lessons from the Sarbanes‐Oxley Act

• Author: Christopher Hung Nie Woo
• DOI: http://doi.org/10.1111/j.1744-1714.2010.01113.x
• Date: 01 March 2011
• Published date: 01 March 2011

United States Securities Regulation

and Foreign Private Issuers: Lessons

from the Sarbanes-Oxley Act

Christopher Hung Nie Woo

n

INTRODUCTION

Is the United States losing its position as the world’s leading capital mar-

ket? Recent statistics suggest that U.S. stock exchanges have been losing

ground to foreign stock exchanges. The share of equity raised in global

public markets represented by the New York Stock Exchange (NYSE),

NASDAQ, and the American Stock Exchange (AMEX) combined dropped

from 28.8% in 2002 to 23.0% in 2009.

1

Foreign delistings from the NYSE

rose from 3.9% of all listed foreign companies in 1997 to 8.7% in 2009.

2

The U.S. market capitalization decreased from 47.8% of the total global

market capitalization in 1999 to 31.6% in 2009.

3

Although in 2000, nine of

the top ten initial public offerings (IPOs) in the world took place on U.S.

r2011 The Author

American Business Law Journal r2011 Academy of Legal Studies in Business

119

American Business Law Journal

Volume 48, Issue 1, 119–176, Spring 2011

n

Vice President and Assistant General Counsel of J.P. Morgan. The views expressed in this

article are solely those of the author and do not necessarily reflect those of J.P. Morgan and/or

any of its affiliates. I acknowledge the valuable comments provided by Howell Jackson, Young

In, Thomas Cheng, Robert Bird, and the anonymous reviewers. This article is a revised and

updated version of an unpublished paper written for the Seminar in International Finance at

Harvard Law School.

1

COMM.ON CAPITAL MARKETS REGULATION,THE COMPETITIVE POSITION OF THE U.S. PUBLIC EQUITY

MARKET 7 (Dec. 4, 2007), available at http://www.capmktsreg.org/pdfs/The_Competitive_Position_

of_the_US_Public_Equity_Market.pdf; WORLD FED’NOFEXCH., 2009 ANNUAL REPORT AND STATISTIC S

118, available at http://www.world-exchanges.org/files/statistics/excel/WFE09%20final.pdf.

2

COMM.ON CAPITAL MARKETS REGULATION,supranote 1, at 21; WORLD FED’NOFEXCH.,supra note

1, at 104–05.

3

Elizabeth F. Brown, The Tyranny of the Multitude Is a Multiplied Tyranny: Is the United States

Financial Regulatory Structure Undermining U.S. Competitiveness?,2BROOK.J.CORP.FIN.&COM.

L. 369, 393–94 (2008); WORLD FED’NOFEXCH., supra note 1, at 102. Market capitalization is as

measured by the World Federation of Exchanges.

exchanges, by 2005, only one of the twenty-five largest IPOs took place on

a U.S. exchange.

4

In the first half of 2010, Asian exchanges dominated

equity IPOs, with $22.6 billion raised on the Shenzhen Stock Exchange

and US$8.9 billion raised on the Shanghai Stock Exchange as opposed to

$6.7 billion on the NYSE.

5

Commentators argue that one reason for the declining importance of the

U.S. stock markets is the high level of regulation in the United States, especially

after the passage of the Sarbanes-Oxley Act in 2002.

6

In response to comment

letters from many foreign private issuers requesting exemptions from some of

the requirements of SOX, the Securities and Exchange Commission (SEC) did

grant certain accommodations. In addition, in 2007, the SEC adopted a rule

that allowed certain foreign private issuers to deregister and no longer be

subject to U.S. securities regulation (the ‘‘deregistration rule’’).

With the recent global financial crisis, however, there have been re-

newed calls for more stringent U.S. regulation to prevent future financial

crises.

7

The current crisis has rattled world markets, resulting in, among

4

Eric Pan, Why the World No Longer Puts Its Stock in Us 2–3 (Dec. 13, 2006) (Benjamin N.

Cardozo Sch. of Law Jacob Burns Inst. for Advanced Legal Stud. Working Paper No. 176),

available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=951705.

5

WORLD FED’NOFEXCH., MARKET HIGHLIGHTS FOR FIRST HALF-Y EAR 2010, 8, available at http://

www.world-exchanges.org/files/file/stats%20and%20charts/July%202010%20WFE%20Market

%Highlights.pdf.

6

Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat 745 (codified in scattered sections

of 11, 15, 18, 28, and 29 U.S.C.) [hereinafter SOX]. Proponents of regulatory competition

argue that the U.S. securities regulatory regime is too onerous and that companies should,

instead, be allowed to choose which jurisdiction’s securities law should apply to them. See, e.g.,

Stephen Choi, Regulating Investors Not Issuers: A Market-Based Proposal,88CAL.L.REV.279

(2000); Stephen J. Choi & Andrew T. Guzman, Portable Reciprocity: Rethinking the International

Reach of Securities Regulation,71S.C

AL.L.REV. 903 (1998); John C. Coffee, Jr., Racing Towards

the Top?: The Impact of Cross-Listings and Stock Market Competition on International Corporate Gov-

ernance, 102 COLUM.L.REV. 1757 (2002); Alan R. Palmiter, Toward DisclosureChoice in Securities

Offerings, 1999 COLUM.BUS.L.REV. 1; Roberta Romano, Empowering Investors: A Market Ap-

proach to Securities Regulation, 107 YALE L.J. 2359 (1998). But there is also a concern that reg-

ulatory competition will lead to a race to the bottom. See James D. Cox, Choice of Law Rules for

International Securities Transactions?,66U.CIN.L.REV. 1179, 1186 (1998) (arguing the parties

should not be able to avoid U.S. securities regulation in private securities transactions partly

because there is a ‘‘need to protect investors from themselves’’). For more on the regulatory

competition debate, see Howell E. Jackson & Eric J. Pan, Regulatory Competition in International

Securities Markets: Evidence from Europe in 1999FPart I,56B

US.LAW. 653, 658 (2001).

7

See, e.g.,John C. Coffee, Jr. & Hillary A. Sale, Redesigning the SEC: Does the Treasury Have a

Better Idea?,95VA.L.REV.707 (2009); Lawrence A. Cunningham & David Zaring, The Three or

120 Vol. 48 / American Business Law Journal

other events, the bankruptcy of Lehman Brothers and some foreign gov-

ernments needing International Monetary Fund packages.

8

In a Novem-

ber 17, 2009 speech, SEC Commissioner Kathleen Casey stated that one of

the lessons of the current financial crisis is that financial stability depends

on investor confidence, which in turn depends on the transparency of fi-

nancial statements.

9

As Congress had directed the SEC to review and study

fair value accounting standards, the SEC delivered a report that included

several recommendations on changes to fair value accounting standards to

Congress which may result in new securities regulations.

10

In an increasingly global market, it is important for the United States

to understandFbefore undertaking further reformsFthe effects of in-

creased securities regulation on the competitiveness of its stock markets.

While U.S. securities laws should be reformed to decrease the risk of, and

mitigate the effects of, future financial crises, absent a global harmonized

regulatory regime, the United States should be careful to minimize the costs

imposed by U.S. securities regulation on foreign private issuers.

11

The

United States benefits from foreign private issuers listing on domestic ex-

changes. And, U.S. investors find it easier to invest in shares of foreign

companies if they are listed in the United States. In addition, foreign

private issuers listed in the United States are subject to U.S. securities law,

which provides better investor protection than many comparable foreign

laws.

12

The experience of foreign private issuers accessing the U.S. market

in the 2000s, especially after SOX and the deregistration rule, provides

useful guidance regarding the effect of strengthened U.S. securities law on

Four Approaches to Financial Regulation: A Cautionary Analysis Against Exuberance in Crisis Re-

sponse,78G

EO.WASH.L.REV. 39 (2009).

8

See, e.g.,Steven M. Davidoff & David Zaring, Regulation by Deal: The Government’s Response to

the Financial Crisis,61ADMIN.L.REV.463 (2009); Karl S. Okamoto, After the Bailout: Regulating

Systemic Moral Hazard, 57 UCLA L. REV. 183 (2009).

9

Kathleen L. Casey,Comm’r, SEC, Lessons from the Financial Crisis for Financial Reporting,

Standard Setting and Rule Making (Nov. 17, 2009), available at http://www.sec.gov/news/

speech/2009/spch111709klc.htm.

10

Id.

11

‘‘Foreign private issuer’’ is defined in Rule 405 promulgated under the Securities Act

of 1933 and Rule 3b-4 promulgated under the Securities Exchange Act of 1934. 17 C.F.R.

§§ 230.405, 240.3b-4 (2010).

12

See infra Part I.A.

2011 / L essons from the Sarbanes-Oxley Act 121