Sabanes-Oxley, Foreign Issuers and United States Securities Regulation

Wednesday, January 1st, 2003 at 12:00 am by Kenji Taneda
Kenji Taneda, Sabanes-Oxley, Foreign Issuers and United States Securities Regulation, 2003 Colum. Bus. L. Rev. 715

One of the striking aspects of the landmark Public Company Accounting Reform and Investor Protection Act of 2002 (better known as the “Sarbanes-Oxley Act” or “Sarbanes-Oxley”) is its consequences for foreign issuers. Over the years, the Securities and Exchange Commission (“SEC”) has responded to the globalization of the U.S. capital markets by making a series of accommodations and exemptions to facilitate the listing of foreign companies on U.S. stock exchanges. With Sarbanes-Oxley, however, Congress seems to have broken this trend, instead favoring uniform application of tough new disclosure and corporate governance requirements for private domestic and foreign issuers alike. The immediate reaction by the international business community was predictably hostile, and the SEC has since softened some of Sarbanes-Oxley’s more controversial provisions by providing limited exemptions for foreign issuers. Nonetheless, there still remains a good deal of confusion and controversy over the proper regulation of foreign issuers under U.S. securities laws.

This paper argues that much of this confusion is attributable to a widening gap between the original premise of the U.S. securities laws in relation to foreign issuers and the new reality of globalization. The two main pieces of U.S. securities litigation, the Securities Act of 1933 (“the *717 Securities Act”) and the Securities and Exchange Act of 1934 (“the Exchange Act”), make no distinction between domestic and foreign private issuers. Nonetheless, the SEC has been forced to provide a number of exemptions, along with separate registration and reporting forms, for foreign issuers, recognizing that non-U.S. companies are often subject to a different set of disclosure and corporate governance requirements in their home countries. The rapid globalization of the last fifteen years has witnessed an unprecedented growth in foreign issuer listings on the U.S. exchanges, thus making these accommodations all the more important in the dynamic of the capital markets structure as a whole. With Sarbanes-Oxley, Congress seemingly reasserted the fundamental principle that U.S. securities laws are supposed to apply uniformly to all private issuers. That this principle has proven unrealistic in the SEC’s subsequent rule-making process demonstrates how globalization has, in a sense, raced ahead of the traditional conceptualization of securities regulation as purely a domestic concern.

It seems appropriate now to consider ways to fashion a more consistent, comprehensive approach to regulating foreign issuers in the 21st century. This paper aims to make a contribution by providing a brief survey and analysis of the relevant issues. First, Part II surveys the historical development of the SEC’s gradual accommodation to foreign issuers, and the disclosure regime that resulted prior to the passage of the Sarbanes-Oxley Act. Part III then examines key provisions of Sarbanes-Oxley and how they have changed this regulatory framework. Part IV conducts an evaluative survey of the current academic debate over the proper treatment of foreign issuers, and concludes with a brief proposal. Specifically, the paper suggests that the benefits of applying U.S. securities law requirements to foreign issuers generally outweighs the costs where the provisions in question serve primarily to promote informational accuracy through disclosure requirements. However, where the primary purpose of a particular provision is to deal with corporate governance concerns, the costs generally outweigh the benefits and the SEC should be prepared to provide exemptions.

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