sec's regulation of foreign private issuers

8/8/2019 SEC's Regulation of Foreign Private Issuers

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Rhetoric and Reality: A HistoricalPerspective on the SECs Regulation ofForeign Private Issuers

Steven M. Davidoff1

If Americas markets arent competitive, investors lose

. . . . If Americas markets are not transparent and open,investors lose.

Christopher Cox, Chairman Securities andExchange Commission2

Abstract

Rhetoric can drive reform. Watch-words like mutual recognition and

global competition have masked a political economy story which has

driven the SECs deregulation of foreign private issuers. While the

substantive result may have been appropriate, the over-all SEC

regulatory process did not produce a nuanced and holistic regulatory

product. Instead, this process resulted in one-size fits all regulation for

foreign private issuers. Filipino or Chinese issuers listed only in the

United States are now regulated in equal measure as a U.K. issuer listed

on the London Stock Exchange and New York Stock Exchange. This is

despite the differing risk profiles and regulatory posture of these issuers.

This articles historical analysis highlights these issues as well as the

difficulty of implementing more rigorous and insulating regulatory

techniques such as cost-benefit analysis as rhetoric and the politics of

regulation overwhelm such approaches. The relevance of this story is

front and center as we face coming SEC regulatory reform in light of the

financial crisis under new watch-words such as investor protection.

I. INTRODUCTIONMutual recognition, competitiveness, harmonization and coordination.These words are the rhetoric of international securities regulation. They

are akin to phrases like low-calorie, fortified or doctor-recommended.These phrases become social goods in and of themselves. What couldpossibly be awry with such self-satisfying terms? But there can be many

1 Associate Professor of Law, University of Connecticut School of Law. Thispaper was prepared for, and presented at, the University of Cincinnati LawSchools Globalization of Securities Regulation Symposium.2 Stephen Labaton, S.E.C. Eases Regulations on Business, THE N.Y.TIMES, Dec.14, 2006.


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Foreign Private Issuer Regulation (Draft Feb 10, 2010)

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wrongs. Low calorie can simply be malnourishing. Doctor recommendedcan be malpractice. Fortified? Fortified with what?

The rhetoric of such smooth sounding phrases can mask similar misdeedsin the regulatory arena. This rhetoric can drive regulatory agendas in thename of social welfare but can also make for less than satisfying

regulatory results. More particularly, these words and the issue saliencethey harbor serve as carriers of regulatory change driven by moretraditional political economy and interest group political agendas. Thefulsome rhetoric of social good forces through this change, but the realpolitical story results in less than holistic and nuanced thought-processes.The administrative rule-making process-- itself fraught with terms likecost-benefit analysis -- can instead be subject to the same politicalvicissitudes as the legislative process.3

We have seen this process unfold in the recent rule-making of theSecurities and ExchangeCommission (SEC) with respect to the regulation of foreign private

issuers. Watch-words like mutual recognition and global competitionhave masked what has been an old-style political economy and interestgroup agenda which has resulted in private benefits to a core group ofbusiness constituencies.4 The results have been paraded as a net socialgood under the aegis of these phrases.

I am more skeptical of the process. The story of U.S. regulation offoreign listings in the new millennium is one of focused efforts by keyinterest groups which have resulted in the steady deregulation of foreign

private issuers in the name of competitiveness. But as I detail in thissymposium piece, this has resulted in a skewed regulatory process. Theproduct has been one-size fits all regulation for foreign private issuers.

Where Philippine or Chinese issuers listed only in the United States areregulated the same as a U.K. issuer listed on the London Stock Exchangeand NYSE. In other words, the broad-based picture of needed change has

3 Cost-benefit analysis is a regulatory tool often advocated in some form for theregulatory state. See CASS R.SUNSTEIN,THE COST-BENEFIT STATE:THE FUTUREOF REGULATORY PROTECTION (2002). It is not without its detractors and remainsa controversial tool. See FRANK ACKERMAN &LISA HEINZERLING,PRICELESS:ON KNOWING THE PRICE OF EVERYTHING AND THE VALUE OF NOTHING (2003).See also Essay Papers, Cost-Benefit Analysis: Legal Economic, and

Philosophical Perspectives, 29 J. Legal Stud. 837 (2000).4 This point is not a new one; many academics have written about the SEC andpublic choice theory on a more general basis. See S.M.PHILLIPS &J.R.ZECHER,THE SEC AND THE PUBLIC INTEREST, 21-23 (1981); James J. Park, TheCompeting Paradigms of Securities Regulation, 57 DUKE L.J. 625 (2007); JohnC. Coates, IV, Private vs. Political Choice of Securities Regulation: A PoliticalCost Benefit Analysis, 41 VA.J.INTL.L. 531 (2001); Jonathan Macey,Administrative Obsolesence and Interest Group Formation: A Case Study of the

SEC at Sixty, 15 CARDOZO L.REV. 909 (1994). See also George Stigler, TheTheory of Economic Regulation, 2 BELL J.ECON. 3 (1971).


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led to a failure to examine the details.5 As so often happens withlegislation, the rhetoric has too fulsomely driven the regulatory agenda.The consequence is that regulation has been devalued beyondeconomically necessary, creating incentives for foreign issuers to list inthe United States in order to extract regulatory advantages to thedetriment of retail investors.

This is not to say that regulators are being deceptive or otherwise evenmisregulating, or that all of this regulation is a net economic loss. Rather,the mask of rhetoric has resulted in a march towards direct goals drivenby a political economy story. The results have been in part good and inpart bad. But they have resulted in wholesale, rather than nuanced,regulation tailored to these watchwords. The goal of regulation toprevent negative externalities and ease economic frictionshas been lostto expediency and political jockeying.

This may be an inevitable part of the regulatory process, but I believe theinternational securities regulatory product could clearly use some fine-

tuning. If this is too much, it is perhaps better to once again recognizethat the political process can infuse the regulatory process as much as thelegislative one. Even the notion of competition has been twisted by thepolitics of this regulation. In the early days of the SEC competition wasequated with ensuring that domestic issuers were subject to regulationequivalent and not more stringent than foreign private issuers.6 Today,the notion of competition has been turned into a movement to deregulateforeign private issuers without regard to domestic ones in the name ofglobalization.

This is true even of the SECs corporate finance division a thoughtfulbody actively engaged with the securities bar and academia and

cognizant of the issues before it. Looking through this guise is helpful inproposing and pushing through future securities regulation outside theinternational arena. It is also helpful for those who may be futilelyadvocating more rigorous and insulating regulatory techniques such ascost-benefit analysis. In fact, the relevance of this story is front andcenter as we face coming regulatory reform in light of the financial crisisunder the watch-words of investor protection and the like.

II. The SEC and the Regulation of Foreign Private IssuersA. The Origins of Foreign Private Issuer Regulation

The origins oftodays foreign private issuer regulation is best centered in1977.7 It was in that year that the SEC first proposed to adopt Form 20-F

5See Christopher Brummer, Stock Exchanges and the New Market ForSecurities Laws, 75 U.CHI.L.REV. 1434 (2008); Steven M. Davidoff,Regulating Listings in a Global Market, 86 N.C.L.REV. 101 (2007).6See infra Part II.A.7 Other key dates were the 1964 Exchange Act amendments extending theregistration requirements for foreign private issuers and the SECs adoption of


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and Exchange Act reporting rules mandating an integrated disclosurescheme for foreign private issuers substantially equivalent to domesticissuers.8 Aficionados of securities regulation will find the release wellworth reading as it reflects many of the same tensions and rhetoric westill see today. Of the 54 comment letters from a soliciting release a yearprior requesting public views on requiring more meaningful disclosure

of foreign private issuers, 49 were critical of the proposal. 9 The letterslargely criticized the rules on the grounds that increased disclosureburdens would deter use of the United States capital markets;consequently, international capital movements would be impaired.10

In response the SEC stated that the comment letters did not coincidewith those of public investors and reflected the views of interestedparties other than foreign issuers, stock exchanges and broker-dealerswho would be most directly affected thereby.11 The protection ofinvestors militated towards this move and that:

[t]hese proposed amendments . . . . constitute, the Commission

believes, a balanced approach toward rectifying that competitiveimbalance and providing more timely and meaningfulinformation to investors, thus promoting the maintenance of fairand honest markets. The Commission further believes thatimproved information about foreign issuers may facilitate thefree flow of capital among nations.12

The competitive balance though, was not what we would today assumewould be the SECs principal concern. Today this would be ensuring thatthe SEC sets a proper regulatory measure to attract and maintain foreignlistings. Then the imbalance of concern to the SEC was to facilitate thefree flow of capital among nations, but also to reduce any competitive

disadvantages reporting domestic issuers possibly suffer in relation toreporting foreign issuers.13 In other words, the SEC decided in 1977 thatnotions of competitiveness warranted raising disclosure requirements forforeign private issuers to a level more equally-footed with domesticissuers. The competitive position the SEC wanted to preserve was that ofU.S. domestic issuers vis--vis international competitors.

Rule 12g3-2 in response thereto in 1967allowing for a safe-harbor if the issuerdid not voluntarily seek out a stock exchange listing. 1976 can also be cited. Itwas in that year that the SECs first solicited comment on improving Form 20-Fdisclosure. See Means of Improving Disclosure by Certain Foreign PrivateIssuers, Exchange Act Release No. 13056, [1976-1977 Transfer Binder] Fed.

Sec. L. Rep. (CCH) 80,830 (Dec. 16, 1976) [hereinafter 1976FPIRELEASE].8 Foreign Private IssuersProposed Rules, Forms and GuidelinesCorresponding to Domestic Requirements, Exchange Act Release No. 14128,[1977-1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,361(Nov. 2, 1977)[hereinafter 1977FPIRELEASE].9Id. at 88,698. See also 1976 FPIRELEASE, supra note 7.10 1977FPIRELEASE, supra note 8, at 88,699.11Id. at 88,697-98.12Id. at 88,698-99.13Id. at 88,698.


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The SEC desired to enhance domestic competitiveness, but this releasealso established a path dependency that would take hold. There would bean integrated disclosure system for foreign private issuers but that systemwould take into account the special needs of foreign private issuers. Eventhough the release would create an integrated regime, it would still

maintain the exemption for foreign private issuers from the quarterly andevent-driven reporting requirements of the Exchange Act.14 In otherwords, the need to put domestic issuers on par with foreign privateissuers would be implicitly balanced against the special needs of foreignprivate issuers.

But in the early years of foreign securities regulation this competitivebalance was still tilted towards leveling the playing field between U.S.and foreign issuers. In 1977, this mitigated that foreign private issuerdisclosure be enhanced. These proposed rules were officially adopted in1979.15 The competitive parity policy it enabled was reiterated in 1983. Itwas in that year that the SEC closed the exemption from registration for

Nasdaq quoted foreign private issuers despite 133 comment lettersprotesting this rule adoption.16 Thus, the ability of foreign private issuersto be listed or quoted on a U.S. exchange without registering their shareswith the SEC was severely limited.

It was also in 1982 that the SEC adopted an integrated disclosure systemfor foreign private issuers offering securities. The SEC stated that indeveloping the proposals the Commission sought to balance the policiesof protecting investors by requiring substantially the same disclosurefrom domestic and foreign issuers and of promoting the public interestby encouraging foreign issuers to register their securities with theCommission.17 Again disclosure parity was echoed; ultimately, both

domestic and foreign issuers should be subject to virtually identicaldisclosure requirements.18 This was a last hurrah. The perceivedcompetitive need to draw more foreign private issuers to the U.S. listingmarket would soon cause the SEC to shift its interest group weighing.

14Id. at 88,706.15 Rules, Registration and Annual Report Form for Foreign Private Issuers,Exchange Act Release No. 16371, [1979-1980 Transfer Binder] Fed. Sec. L.Rep. (CCH) 82,363(Nov. 29, 1979). The SEC received 61 more commentsletters; again almost uniformly opposed to the action. The SEC again rejectedthese comments.Id. at 82,550.16

Foreign Securities, Exchange Act Release No. 6493, [1983-1984 TransferBinder] Fed. Sec. L. Rep. (CCH) 83,435, 86,294 (Oct. 6, 1983). See alsoExchange Act Rule 12g3-2(d)(3) (17 CFR 240.12g3-2(d)(3) (1984)).17 Adoption of Foreign Issuer Integrated Disclosure System, Exchange ActRelease 19,258, [1982-1983 Transfer Binder] Fed. Sec. L. Rep. (CCH) [](Dec. 6, 1982).18 This principle was also reiterated in the proposing release for these rules. SeeIntegrated Disclosure System for Foreign Private Issuers, Exchange Act ReleaseNo. 18279, [1981-1982 Transfer Binder] Fed. Sec. L. Rep. (CCH) 83,054,84,643 (Nov. 20, 1981).


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This balance began to shift during the 1980s. It was in this time periodthat a new architecture, largely pioneered by Linda Quinn director of thedivision of corporation finance from 1986 to 1996 and the SEC Staff,was set in place.19 The disclosure requirements for foreign private issuerswould be reduced. Rules were promulgated or maintained for foreignprivate issuers to be exempt from filing quarterly reports, proxy

requirements, Section 16 requirements, and Form 8-K requirements.20Even then a mutual recognition scheme for Canadian issuers waspromulgated since U.S. requirements reportedly continue to deterforeign companies from entering the U.S. markets.21 A concept releaseon facilitating multi-jurisdictional offers was issued in 1985; RegulationS was adopted in 1990; Rule 144A was codified in 1990; and the SECafter a 1986 conference in Paris began to embrace IOSCO disclosureprincipals. This continued into the 1990s with the adoption of UniversalShelf Registration for foreign private issuers and cross-borderexemptions for M&A transactions.22

The result was thus. Foreign private issuers who wanted to utilize the

U.S. exchanges for a listing or quotation or otherwise offer securities tothe U.S. public would be subject to Form 20-F reporting requirementsrequiring U.S. GAAP reconciliation and the Williams Act takeoverstrictures, but not much else. For those who simply wanted to stay awayfrom the U.S. markets, Rule 12g3-2(b) maintained an open avenue to alisting on the pink sheets without requiring SEC registration.23

19 For a history of these developments, see Edward F. Greene & Linda C. Quinn,Building on the International Convergence of Global Markets: A Model for

Securities Law Reform in INTERNATIONAL SECURITIES MARKETS 2003:EMERGING BEST PRACTICES FOR A RAPIDLY EVOLVING REGULATORY

SCHEME,1372 PLI/Corp 561, App. I (May 8-9, 2003).20See Edwards,Listing of Foreign Securities on U.S. Exchanges, inMODERNIZING U.S. SECURITIES REGULATION: ECONOMIC ANDLEGAL PERSPECTIVES (Lehn & Kahmphuis, Jr., eds. 1992)).21 Multijurisdictional Disclosure, Exchange Act Release No. 27055, [1989Transfer Binder] Fed. Sec. L. Rep. (CCH) 84,432, 80,286 (Aug. 4, 1989). Atthe time there were 150 foreign securities traded on a U.S. exchange and 291quoted on NASDAQ, 99 of which were on the National Market System.Id. at80, 284. The multijurisdictional disclosure system was adopted in 1991 with therelease echoing similar principles. See Multijurisdictional Disclosure andModifications to the Current Registration and Reporting System for CanadianIssuers, Exchange Act Release No. 29354, [1991 Transfer Binder] Fed. Sec. L.Rep. (CCH) 84,812 (Jul. 1, 1991).22

See Appendix A. Perhaps a seminal statement of the SEC approach at thistime was embodied in Policy Statement of the Securities and ExchangeCommission on the Regulation of International Securities Markets, [1988-1989Transfer Binder] Fed. Sec. L. Rep. (CCH) 84,341 (Nov. 1988). The SEC stated[a]s regulators seek to minimize differences between systems, the goal of

investor protection should be balanced with the need to be responsive to therealities of each marketplace.Id. at 89,576. See also March 7, 1985 release.23See 17 CFR 240.12g3-2(b) (1995)). See also Edward F. Greene, et al.,Hegemony or Deference: U.S. Disclosure Requirements in the International

Capital Markets, 50 Bus. Law. 431 (1995).


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This was a species of mutual recognition integrated disclosure wouldstill be maintained, but beyond that -- regulation for these issuers wouldlargely come from their home regulator. This made eminent sense at thetime since the overwhelming majority of foreign private issuers wereEuropean in origin and regulated by their domestic regulator. During thistime period, the U.S. retail capital markets were seen as more advanced

and a listing helpful to an equity premium. This may have been due to anumber of reasons bonding, liquidity, capital markets arbitrage, etc.24But the answer was clear the U.S. offered an attractive retail market forEuropean issuers. This was not reciprocated for U.S. issuers listingabroadU.S. issuers largely stayed listed in the United States.25

This still does not explain the SECs changing view of competitivenessfrom 1977 into the 1980s and 1990s. It appears that in the deregulatoryenvironment of the 1980s and 1990s regulation restrictive regulation offoreign private issuers played against this theme. Moreover, it was duringthis time that the NYSE began to prominently advocate for lighterregulation of foreign private issuers.26 It was also during this time that

large numbers of foreign private issuers actually began to list in theUnited States.27 Chart I.A. sets forth the rise in foreign listings from 1985through to 1995:

24 Why issuers cross-list is the subject of much debate. See inter alia Doidge, etal., Private Benefits of Control, Ownership and the Cross-Listing Decision(March 2005), available athttp://ideas.repec.org/p/nbr/nberwo/11162.html;Amir Licht, Cross-Listing and Corporate Governance: Bonding or Avoiding?, 4CHI.J.INTL L. (2003); William Reese, Jr. & Michael S. Weisbach, Protectionof minority shareholder interests, cross-listings in the United States, and

subsequent equity offerings, 66(1) J.FIN.ECON. 65 (2001).25See John C. Coffee, Jr., The Impact of Cross-Listings and Stock MarketCompetition on International Corporate Governance , 102 COLUM.L.R. 1757,1765 (2002); Marco Pagano, et al., The Geography of Equity Listing: Why DoCompanies List Abroad?, 57J.FIN. 2651, 2652 (2002).26See, e.g., James L. Cochrane,Are U.S. Regulatory Requirements for ForeignFirms Appropriate?, 17 FORDHAM INT'L L.J. S58 (1994). See also RobertaKarmel & Mary S. Head,Barriers to Foreign Issuer Entry Into U.S. Markets, 24LAW &POL'Y INT'L BUS. 1207 (1993).27See Greene & Quinn, supra note 19, at 619.
http://ideas.repec.org/p/nbr/nberwo/11162.htmlhttp://ideas.repec.org/p/nbr/nberwo/11162.htmlhttp://ideas.repec.org/p/nbr/nberwo/11162.htmlhttp://ideas.repec.org/p/nbr/nberwo/11162.html


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Source: Financing Trends in the United States Securities Markets, U.S. Securities ExchangeCommission, Division of corporation Finance, Dec. 31, 1995

The primary counter-vailing interests existent were the public protectionof investors and the need for equal competitive footing between domesticand foreign issuers. The public interest lobby representing these twointerests in the international securities realm was small. In the absence ofany strong opposing interests, the interest group politics played towardsthe deregulation of foreign private issuers. The SEC could no longerignore these interests as opposed to those it so easily batted away in1977. It did not hurt that the SECs new regulation also played towards atransformation in the rhetoric of competitiveness as defined by theSEC in this context.

B. The Technology Bubble and International SecuritiesRegulation

The technology bubble started a gold rush. Foreign private issuers fromworld over flocked to the United States to capture a market bubble equitypremium. The consequences were three-fold. First, smaller sized foreignprivate issuers, mainly in the technology industry, listed in the UnitedStates in record number. Second, foreign private issuers increasinglyspurned a listing in their domestic market and made a United States stockmarket their primary and only listing. Third, foreign private issuers from

outside Europe began to emerge as a significant source of listings in theUnited States. Set forth in Table I.B. sets forth the rise in U.S. listingsfrom 1995-2003:


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The figures in Table I.C. show that, as a consequence of the tech bubblecollapse, there was a significant increase in foreign private issuersregistered with the SEC. Moreover, the type of issuer and their reason forlisting had changed. These issuers were much smaller than prior issuersand more geographically diverse. They also came to the United States insearch of a market-skewed equity premium rather than for status, anacquisition currency, liquidity or other reasons earlier foreign privateissuers cited for listing in the United States.

However, like many of the domestic tech companies who had listed inthe tech boom, many of these companies should never have listed in theUnited States. In the wake of the bubble and the increased regulatorycosts imposed by Sarbanes-Oxley, many smaller tech companies now

had a U.S. listing they did not desire and could not maintain. Yet, at thetime the U.S. securities law system could best be described as a lobstertrap or the Hotel California. Once you listed, it was almost impossible toderegister and remove your listing. You could check in any time, but youcould never leave.29 This led to a large cadre of very discontented andtrapped foreign private issuers.

This phenomenon coincided with a second order effect of the techbubble- pop: foreign private issuers stopped coming to the United States.This would later form a sustaining rationale for outside interest groupefforts to further deregulate foreign private issuers. These interest groupswould attribute this effect to Sarbanes-Oxley and the increased

regulation and perceived hostile regulatory environment it created.30

28 World Federation of Exchanges.29See Edward B. Rock, Securities Regulation as Lobster Trap: A CredibleCommitment Theory of Mandatory Disclosure, 23 CARDOZO L.REV. 675(2002).30See infra Part II.C.


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The issue was far more complex. Issuers tend to not cross-list to beginwith, but when they do they have historically and through today listed inthe United States. In the wake of the tech bubble companies simplystopped cross-listing altogether, and for that matter engaging in initialpublic offerings. Hong Kong had only 10 foreign companies listed as of2004.31 In 2008 it still had only ten listings. The Tokyo Stock Exchange

declined from 30 in 2004 to 16 in 2008. The only bright spot was theLondon Stock Exchanges Alternative Investment Market which becamea refuge for small companies listing. The flow to AIM was seen as aprimary example of U.S. non-competitiveness. 32 Yet, many of thesecompanies would not have qualified to list in the U.S. anyway.33

This trend was exacerbated by the rise of private and more completeequity markets which provided an alternative capital raising outlet. In theprivate realm, the market for foreign equity offered via Rule 144Aexempt offerings in the United States exploded. In 2006, Rule 144Aequity offerings by foreign private issuers amounted to $162 billion.34 Itwas clear that there was now a viable market alternative in the United

States to raising capital outside the public listing markets. Theheightened U.S. regulation imposed on foreign private issuers mayindeed have made the difference and pushed these issuers outside theU.S. stock markets.

The claims of U.S. non-competitiveness were further buttressed byacademic studies which found a decline in U.S. equity premiumscontemporaneous with the adoption of Sarbanes-Oxley.35 To the extentnon-U.S. issuers came here in search for a premium that premium wasgone or diminished. The studies were not uniform and some seemed tothink that times series analysis on over-the counter, illiquid stocks couldprovide meaningful output, but still it appeared that the vaunted U.S.

equity premium was diminished if not entirely dissipated.

31See World Federation of Exchanges, Annual Number of Listed Companies,http://www.world-exchanges.org/statistics/annual/2008/equity-markets/number-listed-companies-0.32 See Sustaining New Yorks and the US Global Financial ServicesLeadership, http://www.fr.com/practice/McKinsey.pdf33 Davidoff, supra note 5.34 Steven M. Davidoff, Paradigm Shift: Securities Regulation in the NewMillennium, 2 BROOK.J.CORP.FIN.&COM.L. 340 (2008); William K.Sjostrom Jr., The Birth of Rule 144A Equity Offerings, 56 UCLALAW REV.409,

412 (2008).35See inter-alia Craig Doidge, et al.,Has New York Become Less Competitive inGlobal Markets? Evaluating Foreign Listing Choices over Time, 91J.FIN.ECON.253 (2009); Kate Litvak, The Effect of the Sarbanes-Oxley Act on Non-U.S. Companies Cross-listed in the U.S., 13 J.CORP.FIN. 195 (2007); KateLitvak, The Long-term Effect of the Sarbanes-Oxley Act on Cross-listingPremia, 14 EUR.FIN.MGMT. 875 (2008); Joseph D. Piotroski & SurajSrinivasan,Regulation and Bonding: The Sarbanes-Oxley Act and the Flow ofInternational Listings , 46 J.ACCT.RES. 383 (2008); Luigi Zingales,Is the U.S.Capital Market Losing Its Competitive Edge? (2007).


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C. The Interest Group Response to Perceived U.S. Non-Competitiveness

The discontent of trapped foreign private issuers was eclipsed by theoutcry of domestic issuers against the new strictures of Sarbanes-Oxley.In the wake of Sarbanes-Oxley, a skein of academic literature supported

by industry commentary expressed an opinion that provisions of theSarbanes-Oxley act were ham-handed, over-broad and too costly.36 Thisstrain of opinion particularly focused on the costs imposed upon issuersby Sarbanes-Oxleys Section 404 requirements, a provision that alsocould have been labeled the accounting and lawyers stimulus act of2002.37

The purpose of this essay is not to re-debate the good and the bad ofSarbanes-Oxley, but rather to examine how the post-Sarbanes-Oxleyrhetoric shaped the SECs regulation of foreign private issuers. Thisrhetoric was driven to a large extent by four committees or studies set-upto study and make recommendations about the efficacy of the Sarbanes-

Oxley Act. These committees and studies were the:

SEC Advisory Committee on Smaller Public Companies; Committee on Capital Markets Regulation; McKinsey & Company Study; and Commission on the Regulation of U.S. Capital Markets in the

21st Century

Roberta Romano in her article Does the Sarbanes-Oxley Act Have aFuture?

38 has a more in-depth survey of the committees work, but forour purposes, it is worth going over their principal recommendations as itrelated to or discussed foreign private issuers and the need for

competitive U.S. capital markets. I discuss each in turn.

The SEC Advisory Committee mainly focused on Sarbanes-Oxley as itaffected domestic issuers.39 The committees primary recommendationwas an opt-in solution for small private issuers with respect to the thornyproblem of Section 404 of Sarbanes-Oxley. In supporting this positionthe committee stated:

36See inter-alia Larry Ribstein,Market vs. Regulatory Responses to CorporateFraud: A Critique of the Sarbanes-Oxley Act of 2002, 28 J.CORP.L. 1 (2002);

Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack CorporateGovernance, 114 YALE L.J. 1521 (2005).37See Final Report of the Advisory Committee on Smaller Public Companies tothe U.S. Securities and Exchange Commission (Apr. 23, 2006), available athttp://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf[hereinafter SPCFINAL REPORT]. See also Joseph A. Grundfest & Steven E. Bochner, Fixing 404,105 MICH.L.REV.1643 (2007); Peter Iliev, The Effect of the Sarbanes-OxleyAct (Section 404) (2007), available at http://ssrn.com/abstract=98377238 26 YALE J. ON REG. 229.39 SPCFINAL REPORT, supra note 37
http://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdfhttp://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdfhttp://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf


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A number of data points lead us in this direction . . .

Some companies are either going dark or going private orconsidering doing so; The London Exchanges Alternative Investment Market(AIM) for smaller public companies is gaining momentum;

Foreign new listings in the United States during 2005dropped considerably from the previous year; Foreign issuers are departing from the U.S. market (andtheir institutional investors are voting for their goingoffshore); and U.S. investors continue to invest in foreign securities eventhough the issuers are not subject to internal controlrequirements like those promulgated under Section 404.

Without deciding whether Section 404 is beneficial for investorsin smaller public companies, we believe that in light of ourreasons for recommending exemptive relief for these companies

unless and until an appropriate framework for assessing theirinternal control is developed, permitting them to comply or takeadvantage of the relief is the appropriate course of action torecommend.40

In other words, the protection of investors was trumped by the efficacyof deregulation in the name of competitiveness. The competitive threathere was the mostly foreign threat of non-U.S. issuers listing and raisingcapital abroad and U.S. investors investing in such companies. Thelinkage was curious as small U.S. issuers were quite unlikely to goabroad, and historically non-U.S. issuers were similarly unlikely to seeka U.S. listing.41 Still, the perceived loss of U.S. international

competitiveness in this case apparently justified against the investorprotection balance the committee set.

The Committee on Capital Markets Regulation (CCMR) was formed inSeptember 2006. The CCMR was a private creation but was apparentlyformed at the suggestion and behest of then Secretary of Treasury HankPaulson.42 The CCMR acted expeditiously and issued out its first interimreport on November 30, 2006.43 The tenor of the report is best recordedby its statement in the executive summary that the evidence presented . .. .suggests that the United States is losing its leading competitive positionas compared to stock markets and financial centers abroad.44 The reportstated that this was due to four reasons:

40Id. at 41-42.41 Davidoff, supra note 5.42 Romano, supra note 38, at 244.43 Committee on Capital Markets Regulation,Interim Report of the Committeeon Capital Markets Regulation (Nov. 30, 2006), available athttp://www.capmktsreg.org/pdfs/11.30Committee_Interim_ReportREV2.pdf44Id. at ix.


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(i) an increase in the integrity of and trust in major foreign publicmarkets resulting from more transparency and better disclosure; (ii) arelative increase in the liquidity of foreign and private markets, thusmaking it less necessary to go to the U.S. public equity capitalmarkets for funding; (iii) improvements in technology, making iteasier for U.S. investors to invest in foreign markets; and (iv)

differences in the legal rules governing the U.S. public markets andthe foreign and private alternatives.45

The CCMR made a number of recommendations with respect toregulation of both domestic and foreign issuers, but in the internationalsecurities realm made a relatively modest recommendation that newforeign private issuers be allowed to reserve the right to deregister andthat current foreign private issuers be allowed to exclude institutionalinvestors for purposes of calculating their U.S. shareholder base.46 Thereports low-key recommendation in this arena was presumably based ona countervailing tension cited in its report to balance deregulation offoreign private issuers against protecting retail investors.47

The CCMRs first report was followed up by a second report issued onDecember 4, 2007 entitled The Competitive Position of the U.S. PublicEquity Market.48 The report labeled itself a second wake-up call andbegan by stating that [b]y any meaningful measure, the competitivenessof the U.S. public equity market has deteriorated significantly in recentyears.49 The committee did not make any recommendation in this reportsimply preferring to highlight the U.S. competitive decline it found. Thealarmed tone of its second report was a bit surprising since the mainrecommendation of the reportat least to the extent it dealt with foreignprivate issuers had been adopted in March of 2007. This may havebeen due to the institutionalization of the CCMR at Harvard Law School

and an apparent reassessment if its prior recommendations and the needfor more. Nonetheless, the CCMR has continued this siren call withfurther claims that the U.S. competitive position is in perilous decline.50

The McKinsey & Company Study was commissioned by New YorkCitys Economic Development Corporation and was supported by NewYork City Mayor Michael Bloomberg and Senator Charles Schumer. The

45Id. at 4-546Id. at 66.47Id.48

Committee on Capital Markets Regulation, The Competitive Position of theU.S. Public Equity Market(Dec. 4, 2007), available athttp://www.capmktsreg.org/pdfs/The_Competitive_Position_of_the_US_Public_Equity_Market.pdf49Id. at v, 1.50See, e.g., Committee on Capital Markets Regulation, Amid Plunging IPOActivity in 2008, CCMR Finds thatU.S. Public Equity Market Competitiveness Continues its Decline (Sept. 3,2008), available at http://www.capmktsreg.org/press/9-3-08_CCMR_Q2_competitiveness_update.pdf


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report was issued on January 22, 2007 and sounded similar alarm bellsabout the decline of U.S. competitiveness.51 The study stated:

[t]he threat to US and New York global financial servicesleadership is real. . . .It is clear that the country and the City need totake this threat seriously.52

In this light the study found that America was failing to compete on areal and perceptions basis.53 The study made eight criticallyimportant near term and long term recommendations.54 The firstrecommendation was for relaxation of Sarbanes-Oxleys requirementsparticularly with respect to Section 404 and its application to smallissuers. Embedded in this recommendation was also a recommendationthat the SEC should exempt foreign companies that comply with thecorporate governance standards of SEC-approved foreign regulatorsfrom also having to comply with the requirements of Sarbanes-Oxley.55The second recommendation was the bug-bear of many -- securitieslitigation reform. The other significant recommendation with respect to

foreign private issuers was recommendation five to [r]ecognize IFRSwithout reconciliation and promote convergence of accounting andauditing standards.56 This report was a direct blow against regulation offoreign private issuers and accordingly the mention of retail investorsand protection of their interests was absent from the report. Notsurprisingly, given that a consulting firm was retained to prepare thisreport with a specific goal in mind U.S. capital marketscompetitiveness -- there were no counter-vailing interests to consider.

The final study was the Commission on the Regulation of U.S. CapitalMarkets in the 21st Century set up by the U.S. Chamber of Commerce inFebruary of 2006. The committee issued its report in March 2007.57 The

report argued that [u]nfortunately, the competitive position of ourcapital markets is under strainfrom increasingly competitiveinternational markets and the need to modernize our legal and regulatoryframeworks.58 The report noted the tension between protectinginvestors and promoting capital formation but highlighted the samefigures as the McKinsey report and the CCMR to show that companieswere no longer opting to list in the United States in the same number as

51 McKinsey & Co., Sustaining New Yorks and the US Global FinancialServices Leadership (Jan. 22, 2007), available athttp://www.fr.com/practice/McKinsey.pdf52Id. at 10.53

Id. at 14-15.54Id. at 19-28.55Id. at 99-100.56Id. at 109-110.57 Commission on the Regulation of U.S. Capital Markets in the 21st Century,Report and Recommendations (Mar. 2007), available athttp://www.capitalmarketscommission.com/NR/rdonlyres/eozwwssfrqzdm3hd5siogqhp6h2ngxwdpr77qw2bogptzvi5weu6mmi4plfq6xic7kjonfpg4q2bpks6ryog5wwh5sc/0703capmarkets_full.pdf. [hereinafter COMMISSION REPORT]58Id. at 4.
http://www.capitalmarketscommission.com/NR/rdonlyres/eozwwssfrqzdm3hd5siogqhp6h2ngxwdpr77qw2bogptzvi5weu6mmi4plfq6xic7kjonfpg4q2bpks6ryog5wwh5sc/0703capmarkets_full.pdfhttp://www.capitalmarketscommission.com/NR/rdonlyres/eozwwssfrqzdm3hd5siogqhp6h2ngxwdpr77qw2bogptzvi5weu6mmi4plfq6xic7kjonfpg4q2bpks6ryog5wwh5sc/0703capmarkets_full.pdfhttp://www.capitalmarketscommission.com/NR/rdonlyres/eozwwssfrqzdm3hd5siogqhp6h2ngxwdpr77qw2bogptzvi5weu6mmi4plfq6xic7kjonfpg4q2bpks6ryog5wwh5sc/0703capmarkets_full.pdfhttp://www.capitalmarketscommission.com/NR/rdonlyres/eozwwssfrqzdm3hd5siogqhp6h2ngxwdpr77qw2bogptzvi5weu6mmi4plfq6xic7kjonfpg4q2bpks6ryog5wwh5sc/0703capmarkets_full.pdfhttp://www.capitalmarketscommission.com/NR/rdonlyres/eozwwssfrqzdm3hd5siogqhp6h2ngxwdpr77qw2bogptzvi5weu6mmi4plfq6xic7kjonfpg4q2bpks6ryog5wwh5sc/0703capmarkets_full.pdfhttp://www.capitalmarketscommission.com/NR/rdonlyres/eozwwssfrqzdm3hd5siogqhp6h2ngxwdpr77qw2bogptzvi5weu6mmi4plfq6xic7kjonfpg4q2bpks6ryog5wwh5sc/0703capmarkets_full.pdfhttp://www.capitalmarketscommission.com/NR/rdonlyres/eozwwssfrqzdm3hd5siogqhp6h2ngxwdpr77qw2bogptzvi5weu6mmi4plfq6xic7kjonfpg4q2bpks6ryog5wwh5sc/0703capmarkets_full.pdf


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prior years.59 The report was more receptive to counter-vailing evidencethan either the McKinsey study or the CCMR reports. The report stated:

One study from Ernst & Young notes that, during the first half of2006, there were 77 IPOs that listed outside their domicilecountry, yet only 17 of these actually represented in-play

IPOs, or those presenting competitive opportunity for U.S.markets. 3 Of those 17, 11 did list on a U.S exchange. Thissuggests that the competitive position of the United States for in-play IPOs has not dramatically deteriorated, despite the largershifts in capital market dynamics.60

The committee largely focused on domestic issues but recommendedsubstituted compliance.61 This was an idea put forth by Ethiopis Tafaraand Robert J. Peterson in their 2007 articleA Blueprint for Cross-BorderAccess to U.S. Investors: A New International Framework.62 Substitutedcompliance as proposed by Tafara and Peterson argued for a systemwherein foreign stock exchanges and broker-dealers applied to the SEC

for an exemption from SEC registration premised on their oversight andcompliance with the laws and regulator of a foreign jurisdiction withcomparable securities laws.63 This was not full mutual recognition as itdid not include listings; only brokers and exchanges. Still, it was asignificant step towards this goal. The committee also recommendedincreasing convergence between U.S. GAAP and IFRS and a system ofmutual recognition of IFRS for [all] issuers.64

It was clear from all of these reports that the discourse was being phrasedas a need to keep U.S. markets competitive. This competition requiredreducing regulation on non-U.S. issuers. To the extent that the protectionof retail investors or other domestic interests mitigated the status quo

or increased regulation, the requirement of competitiveness militatedagainst these interests.

The competitiveness of the United States in attracting foreign privateissuers was also often used as evidence to argue for reduced burdens onsmall issuers. In part this was because the foreign private issuer marketappeared to provide the best evidence for an argument that the UnitedStates was in decline. Yet, these are different markets and equating thetwo is a subtle matter. There may very well have been increased burdenson smaller issuers, but these may have been unrelated to the actions andregulation of foreign private issuers. It may not have even been theproper connection. Lately, the decline in small issuer IPOS is being

attributed more to market structure and the rise of on-line brokerages and

59Id. at 17.60Id. at 361 Id. at 36-40.62 Ethiopis Tafara and Robert J. Peterson,A Blueprint for Cross-Border to U.S.Investors: A New International Framework, 48 HARV.INTL L.J. 31 (2007).63Id. at 32.64 COMMISSION REPORT, supra note 57, at 48.


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decline of brokerage commissions and research arms rather thanSarbanes-Oxley.65 This latter tack is supported by the fact that thedecline in small issuer IPOs traces back well before the passage ofSarbanes-Oxley and the decline in foreign private issuer listings.Nonetheless, the decline of both was an easy harbinger to argue for aroll-back of Sarbanes-Oxley. The blunter rhetoric of equating the two

and rolling them into a declining United States was both politically astuteand fit with the rhetoric of the reports.

Roberta Romano documents a rise in news discourse and Congressionalattention about the Sarbanes-Oxley Act in tandem with the creation andreports of these committees. The purpose of her article is to ablydocument the news and legislative atmosphere spurring and surroundingpotential legislative reform for the Sarbanes-Oxley Act. Two of thephrases she tracks in the national news media during this time are clearlythose of rhetorical flourish: Market Competitiveness and Foreign-Market Competitiveness.66 Not surprisingly, she finds that the phraseMarket Competitiveness has only 4 mentions in 2004, but 75 in 2006

in the national newspapers.67 She finds 3 and 57 mentions in 2004 and2006, respectively for foreign market competitiveness.68 She attributesthis rhetorical atmosphere to an increases willingness by legislators toreconsider Sarbanes-Oxley.69 The financial crisis has stalled thislegislative action. But this discourse did have its intended effect in theregulatory arena.

D. The SEC ResponseThe SEC, under the stewardship of Christopher Cox, responded. Therewere four significant actions by the SEC with respect to foreign privateissuers during the time period of 2005-2008.

The SEC delayed the application of Sarbanes-Oxleys Rule 404for several years to allow for foreign private issuers to preparefor the requirement and for SEC implementing regulation on thesubject;70

The rules governing cross-border tender offers, exchange offers,rights offerings and business combinations were relaxed tofurther accommodate these transactions;71

65 David Weild & Edward Kim, Grant Thornton LLP,Market Structure isCausing the IPO Crisis (Oct. 2009), available athttp://www.grantthornton.com/staticfiles/GTCom/Public%20companies%20and

%20capital%20markets/Files/IPO%20crisis%20-%20Sep%202009%20-%20FINAL.pdf.66 Romano, supra note 38, at 31267Id.68Id.69Id. at 306.70See Robert, G. DeLaMater,Recent Trends in SEC Regulation of ForeignIssuers 39 CORNELL INTL L.J. 109, 118 (2006).71See Guidance and Revisions to the Cross-Border Tender Offer, ExchangeOfferings and Business Combination Rules and Beneficial Ownership Reporting
http://www.grantthornton.com/staticfiles/GTCom/Public%20companies%20and%20capital%20markets/Files/IPO%20crisis%20-%20Sep%202009%20-%20FINAL.pdfhttp://www.grantthornton.com/staticfiles/GTCom/Public%20companies%20and%20capital%20markets/Files/IPO%20crisis%20-%20Sep%202009%20-%20FINAL.pdfhttp://www.grantthornton.com/staticfiles/GTCom/Public%20companies%20and%20capital%20markets/Files/IPO%20crisis%20-%20Sep%202009%20-%20FINAL.pdfhttp://www.grantthornton.com/staticfiles/GTCom/Public%20companies%20and%20capital%20markets/Files/IPO%20crisis%20-%20Sep%202009%20-%20FINAL.pdfhttp://www.grantthornton.com/staticfiles/GTCom/Public%20companies%20and%20capital%20markets/Files/IPO%20crisis%20-%20Sep%202009%20-%20FINAL.pdfhttp://www.grantthornton.com/staticfiles/GTCom/Public%20companies%20and%20capital%20markets/Files/IPO%20crisis%20-%20Sep%202009%20-%20FINAL.pdfhttp://www.grantthornton.com/staticfiles/GTCom/Public%20companies%20and%20capital%20markets/Files/IPO%20crisis%20-%20Sep%202009%20-%20FINAL.pdf


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The SEC adopted rules allowing for the deregistration anddelisting of foreign private issuers and Rule 12g32-b was furtheramended to accommodate for exemptions thereunder;72 and

non-U.S. issuers were allowed to use IFRS for their U.S.reporting requirements.73

These last two acts were particularly consequential. The biggestimpediment to a U.S. listing has always been the U.S. GAAPreconciliation requirements. European issuers had to spend months,sometimes years working with local auditors to prepare these statements.I practiced as a corporate attorney in Europe from 2000-2005, and I canassure you that it was an excruciatingly slow and inexact process. Localauditors from the global accounting firms were attempting to learn andimplement U.S. GAAP by correspondence with their U.S. counterpartoffices. The consequence was that the U.S. GAAP reconciliationrequirements were the principal impediment to a U.S. listing.74 In fact,perversely some large market capitalized European issuers deliberatelydid list in the United States for anti-takeover purposes.75 This made it

almost impossible for one of their non-U.S. listed counterparts to bid forthem as they would inherit the U.S. GAAP registration requirements,something that was impractiable for them to comply with in any timelymanner.

The relaxation of this entry listing requirement was complimented withelimination of the restrictions on exit from the U.S. markets. Theadoption of new Exchange Act rules in March 2007 allowed non-U.S.issuers to freely delist and terminate their registration under Section12(g) and duty to file reports under Section 13(a) or 15(d) of theExchange Act.76 In the wake of the enactment of this rule approximately94 foreign private issuers delisted their shares from the NYSE in the next

two years.77 Moreover, also in September 2008, the SEC relaxed theRule 12g32-b exemption by eliminating the written application and papersubmission requirements.78 This further stream-lined the exit process

Rules for Certain Foreign Institutions, Exchange Act Release No. 58597, [2008Transfer Binder] Fed. Sec. L. Rep. (CCH) 88,286 (Sep. 10, 2008) [hereinafterCROSS-BORDER RELEASE].72Termination of a Foreign Private Issuers Registration of a Class of SecuritiesUnder Section 12(G) and Duty to File Reports Under Section 13(A) or 15(D) ofthe Securities Exchange Act of 1934, Exchange Act Release No. 55540, [2006-2007 Transfer Binder] Fed. Sec. L. Rep. (CCH) 87,785 (Mar. 27, 2007)[hereinafter DEREGISTRATION ADOPTING RELEASE].73

Use of IFRS Without GAAP Reconciliation, Exchange Act Release No.57026, [2007-2008 Transfer Binder] Fed. Sec. L. Rep. (CCH) 88,032 (Dec. 21,2007) [hereinafter IFRSADOPTING RELEASE].74See Kun Young Chang,Reforming U.S. Disclosure Rules in Global SecuritiesMarkets, 22 ANN REV.BANKING &FIN.L., 237, 241 (2003).75See Amir N. Licht, Genie in a Bottle? Assessing Managerial Opportunism inInternational Securities Transactions , 2000 COLUM.BUS.L.REV. 51, 94 (2000).76 DEREGISTRATION ADOPTING RELEASE, supra note 72.77 World Federation of Exchanges.78 DEREGISTRATION ADOPTING RELEASE, supra note 72.


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from the U.S. markets. The SEC now had a solution for foreign privateissuers who complained bitterly about Section 404 or other U.S.regulationyou are free to go at any time.

The consequence was to open the toll road into and out of the UnitedStates. Foreign private issuers could now relatively freely list and delist

from the United States. In fact, due to some perverse effects of the listingrules, some foreign acquirers did so stating the clear intent to delist in ayear, registering only for purposes of the acquisition. This mostprominently happened in the $144 billion business combination of theFrench companies Suez and Gaz de France. Suez specifically stated in its571 page registration statement that it would deregister the shares it wasregistering and listing as soon as the one-year time period under Rule12g32-b elapsed.79

This was a marked departure from almost 30 years of SEC rule-makingwhich had at least required U.S. GAAP and imposed real substantiveelements on foreign private issuers accessing the U.S. retail market. It

was an inevitable result, though, of the SEC departure from equivalentdisclosure between foreign private issuers and domestic issuers towards acompetitive advantage in drawing these issuers to the United States. Itwas also a recognition of the difficulty of maintaining fences aroundglobal capital.

E. Analysis of the ReleasesThe rhetoric driving this expansive rule-making was echoed in theadopting and proposing releases for these SEC actions. Take, forexample the new deregistration requirements long advocated bypractitioners and foreign private issuers. In the first proposing release

issued on December 23, 2005, the SEC asserted that marketglo balization andadvances in information technology had resulted ina significant increase in foreign companies that have engaged in cross-border activities and sought listings in U.S. securities markets . . ..80

The statement seems to be typical of our time capital markets areglobalizing and changing. Who could argue with that? What was notableabout this statement and the release was that nowhere did it mention theinterests or protection of retail investors. As for global competition,this was both an implicit and explicit premise behind the rule proposal.The SEC release cited as the primary justification for the proposed rule-making criticism by representatives of foreign companies and foreign

79See Steven M. Davidoff, French Deal, American Red Tape, N.Y.TIMESDEALBOOK (Jun 17, 2008), available athttp://dealbook.blogs.nytimes.com/2008/06/17/french-deal-american-red-tape/.80 Termination of a Foreign Private Issuers Registration of a Class of SecuritiesUnder Section 12(G) and Duty to File Reports Under Section 13(A) or 15(D) ofthe Securities Exchange Act of 1934, Exchange Act Release No. 53020, [2005-2006 Transfer Binder] Fed. Sec. L. Rep. (CCH) 87,515, 82, 837 (Dec. 232005).


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industry associations of the requirement that a foreign private issuercould not deregister unless it was below the 300 U.S. resident

shareholder test.81 The SEC also considered the affect of these rules oncompetition as required by Section 23(a)(2) of the Exchange Act. Herethe SEC concluded that:

[b]y providing increased flexibility for foreign private issuersregarding our Exchange Act reporting system, the proposed ruleswould encourage foreign companies to participate in U.S. capitalmarkets as Exchange Act reporting companies to the benefit ofinvestors. In so doing, the proposed rules should foster increasedcompetition between domestic and foreign firms for investors inU.S. capital markets.82

The release was also distinguishable for its failure to mention retailinvestor protection and counter-vailing investor protectionconsiderations. Instead, the requirements of globalization andcompetition were driving this rule-making change.83 Foreign interests

and the need to bring their listings to the United States militated this rule-making. This was no longer 1977. To the extent the interests of retailinvestors were relevantthe rule would bring more competition betweendomestic and foreign competitors for U.S. capital. No supporting citationwas provided to this principle.

This was reiterated in the second proposing release for these rules issueda year later on December 22, 2006.84 The primary purpose of the newlyreproposed rule was to put forth a more friendly foreign private-issuertest based on average daily trading volume rather than a requirement thatthe foreign private issuer be a well-known seasoned issuer and have beena reporting issuer in the United States for the past two years as well as a

hybrid U.S. public float and U.S. trading volume test.85

This jibed withthe majority of the 50 comment letters the SEC had received in responseto the first release who stated that this would unduly inhibit a significantportion of U.S. registered foreign private issuers from exiting theExchange Act.86 It was also a fact that the SEC cited in its competitionreview in the release.

The interests of retail investors now made their appearance. The SECjustified this rule change when weighed against the need to protect retailinvestors since:

81Id. at 82,837-8.82Id. at 82,860-61.83Id. at 82,838-40.84Termination of a Foreign Private Issuers Registration of a Class of SecuritiesUnder Section 12(G) and Duty to File Reports Under Section 13(A) or 15(D) ofthe Securities Exchange Act of 1934, Exchange Act Release No. 55005, [2006-2007 Transfer Binder] Fed. Sec. L. Rep. (CCH) 87,735 (Dec. 22, 2006).85Id. at 84,001.86Id.


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[w]e believe the reproposed rules appropriately providemeaningful protection of U.S. investors by permitting thetermination of Exchange Act registration and reporting only byforeign registrants in whose U.S. registered securities relativeU.S. market interest is low. We believe the proposed conditionsgoverning eligibility to use the trading volume-based measure,

along with the other proposed conditions concerning priorExchange Act reporting, the prohibition against recent registeredU.S. offerings, and required foreign listing should further serveto protect U.S. investors.87

In other words, the SECs protective concern was ensuring that onlyforeign private issuers with limited trading volume could deregister. Thismay have been a valid interest, but any counter-vailing interests were notdiscussed. This could have encompassed the effects of such a departureon U.S. investors who were stuck holding securities with lesserprotections than initially imposed at the time of their purchase. Instead,the argument had been channeled by the SEC staff into a question of

what would be in the best interests of foreign private issuers withinevitable consequences. The SEC adopted these rules with some tweaksto make them more foreign private issuer friendly and they becameeffective on June 4, 2007.88

The other significant, indeed revolutionary, SEC action during this timewith respect to foreign private issuers was the adoption of rules allowingforeign private issuers to meet their accounting disclosure requirementswith financial statements prepared in accordance with IFRS as issued bythe International Accounting Standards Board without a U.S. GAAPreconciliation. The adoption of a release allowing foreign private issuersto use IFRS was the culmination of almost 20 years of thought and study

on the matter. It had started in the new millennium with a ConceptRelease on International Accounting Standards issued in February 2000.The proposing release itself specifically cited the goal towardharmonization. This had been affirmed by SEC Chairman Cox who inFebruary 2006 stated his commitment to the Roadmap set forth bySEC Chief Accountant, Donald Nicolaisen, in April 2005, setting forththe goal of achieving one set of high quality, globally acceptedaccounting standards.89 The proposing release itself detailed theseefforts in five pages as part of a historical path for a robust process forconvergence.90

The justification for this change? The SEC revisited the parity argument

it had raised in 1977. It is worth quoting from at length:

87Id.

88 DEREGISTRATION ADOPTING RELEASE, supra note 72, at 84,472.89 Donald T. Nicolaisen,A Securities Regulator Looks at Convergence (Apr.2005), available at http://www.sec.gov/news/speech/spch040605dtn.htm.90 Use of IFRS Without GAAP Reconciliation, Securities Act Release No. 8814,[2007 Transfer Binder] Fed. Sec. L. Rep. (CCH) 88,032, 84,970-75 (Jul. 2,2007) [hereinafter IFRSPROPOSING RELEASE].


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Given the dual considerations of investor protection andeven-handedness towards foreign private issuers, theCommission has framed its consideration of thereconciliation requirement as a balancing of two policy

concerns: investors need for the same type of basicinformation when making an investment decisionregardless of whether the issuer is foreign or domestic, andthe public interest served by an opportunity to invest in avariety of securities, including foreign securities.Investorsneed for the same type of basic information implies thatforeign and domestic registrants should be subject to thesame disclosure requirements. However, the burden onforeign issuers of meeting the identical disclosure standardsas domestic issuers might discourage them from offeringtheir securities on the U.S. market. If foreign issuers chosenot to offer their securities in the United States, it woulddeprive U.S. investors of investment opportunities andpotentially compel them to purchase foreign securities onforeign markets, where disclosure may be less . . .91

The adoption of IFRS was quite controversial.92 In response to theproposing release, the SEC received 125 comment letters.93 Many ofthese letters highlighted the need to retain U.S. GAAP for investorprotection purposes. A subset of these letters raised alarm about possibleconfusion the use of IFRS might sow among retail investors. The SECrejected these concerns stating that these amendments will helpinvestors to understand international investment opportunities more

clearly than reliance on a multiplicity of accountingstandards.94Moreover, to the extent these investors wanted to orotherwise could, education of investors would enable them to furtherunderstand these rules. The SEC stated:

Due to the cost to issuers of preparing the reconciliation to U.S.GAAP from IFRS, we believe that the amendments are likely topromote efficiency by eliminating financial disclosure that iscostly to produce. We believe that investors would haveadequate information on which to base their investmentdecisions and that capital may be allocated on a more efficientbasis.95

91Id. at 84,970-71.92See Lawrence A. Cunningham, The SEC's Global Accounting Vision: ARealistic Appraisal of a Quixotic Quest, 87 N.C.LAW REV. (2008).93 IFRSADOPTING RELEASE, supra note 73, at 85,758.94Id. at 85,763.95Id. at 85,785.


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The competitive strain of the SECs attempts to lighten the burden onforeign private issuers had dominated.

The proposing and adopting releases thus put forth a world view wherethe needs of foreign private issuers due to globalization andcompetition necessitated these changes. To the extent that the needs of

retail investors were accounted for, the debate was phrased in terms ofthe benefits that foreign investors would receive by access to theseinvestments. The needs of domestic issuers for a leveling playing fieldcited in 1977 had been disregarded for a need to provide access to theseissuers. A justification for this access was ironically the large number ofissuers who now had listed in the United States. The parity argumentinvoked in 1977 to raise U.S. regulatory requirements on foreign privateissuers in order to allow domestic issuers to compete had been flipped onits head.

Moreover, the SEC did not cite any countervailing principles. Instead,the SEC set forth its needs and priorities measuring them through the

comment process. These comments were indeed counting and interestgroup politics at its best. The SEC was also particular in recognizingthese interest groups. In the case of these two rule-makings the SEC spunthe comments to reflect its agenda.

The SEC is not governed by the government OMB requirements for cost-benefit analysis. Nevertheless and to be fair, the SECs adopting releasesfor IFRS and the deregistration rules did contain sections entitled cost-

benefit analysis. A review of this section reveals that while it didattempt to quantify some savings and costs, this was not the rigorousreview advocated by many, even among the SEC.96 There was no realweighing or analysis. Reviewing the section, it appears as results driven

as the rest of each of the adopting releases.

It is useful to contrast the SECs IFRS and deregistration rule-makingwith the case of the cross-border release and the rules it adopted duringthis same period. In that release, the SEC acted to fine tune and updatethe cross border exemptions it had adopted in 1999. In the case of thecross-border release, 22 comment letters were submitted, many of whichnoted significant problems with imposing U.S. regulation on cross-border transactions as well as criticizing the manner the SEC determinedthese exemptions.97 Despite criticism from law firms and representativesof foreign organizations, the SEC resisted the industry and foreigncomment letters to refuse to adopt much more lenient rules in the name

of investor protection. The SEC stated [w]e believe the revisionsappropriately balance the need to protect U.S. investors through theapplication of protections afforded by U.S. law, while facilitatingtransactions that may benefit all security holders, including those in the

96See infra note 129.97 CROSS BORDER RELEASE, supra note 71, at 87,174-179. The SEC commentsare available athttp://www.sec.gov/comments/s7-10-08/s71008.shtml(lastaccessed Dec. 31, 2009).
http://www.sec.gov/comments/s7-10-08/s71008.shtmlhttp://www.sec.gov/comments/s7-10-08/s71008.shtmlhttp://www.sec.gov/comments/s7-10-08/s71008.shtmlhttp://www.sec.gov/comments/s7-10-08/s71008.shtml


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United States.98Unlike with IFRS and the deregistration release, theSEC had struck the balance of investor protection in favor of moreregulation.

The difference was likely in the atmosphere of the time and thesurrounding interest group rhetoric. The IFRS and deregistration releases

were the subject of outside reports and Congressional scrutiny. Theadoption of these two agendas was covered extensively in the news.They were also trumpeted by the SEC as signs of the organizationsresponsiveness to threats to U.S. competition and criticism of Sarbanes-Oxley. Moreover, the EU lobbied heavily for this rule change.99 In short,these two actions allowed the SEC to act effectively to appear responsiveto the most vocal and powerful interest groups in this debate.

In contrast, the Cross-Border release adopted rules that were the arcaneprovince of the M&A office of the SEC.100 There was no reporting on therelease in the New York Times and the Wall Street Journal.101 Theattention this rule-change brought was primarily from law firms and

some foreign practitioner organizations.102 In other words, the interestgroup mix at the time and public rhetoric and attention surrounding thisrelease was akin to the interest group story existent in 1977 when theSEC began its integration project. The SEC thus once again felt safe toignore this criticism reinforcing the political economy story this essayrelates.

In all of this rule-making, not one of the releases cited any committeereports discussed in Section II.C. except for the SEC-established one.There is still no doubt that the SEC was operating in an atmosphere inwhich it was well aware of what was occurring. In speeches andtestimony SEC commissioners paid heed to these reports and claims of a

U.S. capital markets decline.103

The Staff also noted this in conferencesand articles. News reports quoted government officials as aware of and

98Id. at 87,171.99 Roberta S. Karmel, The EU Challenge to the SEC, 31 FORDHAM INTL L.REV.1692 (2008).100 Steven M. Davidoff, Getting U.S. Security Holders to the Party: The SECsCross-Border Release Five Years On, 12 U.PENN J.INTL ECON.L. 455 (2005)101 Westlaw and Lexis searches with date restriction of 2008 (search: takeover

or merger or cross w/2 border and SEC).102See SEC comments available athttp://www.sec.gov/comments/s7-10-08/s71008.shtml(last accessed Dec. 31, 2009).103See, e.g., Roel C. Campos, Commissioner, Sec. Exch. Commn, RemarksBefore the Consumer Federation of America Financial Services Conference(Dec. 1, 2006), available athttp://www.sec.gov/news/speech/2006/spch120106rcc.htm; Roel C. Campos,Commissioner, Sec. Exch. Commn, SEC Regulation Outside the United States(Mar. 8, 2007), available athttp://www.sec.gov/news/speech/2007/spch030807rcc.htm
http://www.sec.gov/comments/s7-10-08/s71008.shtmlhttp://www.sec.gov/comments/s7-10-08/s71008.shtmlhttp://www.sec.gov/comments/s7-10-08/s71008.shtmlhttp://www.sec.gov/comments/s7-10-08/s71008.shtmlhttp://www.sec.gov/comments/s7-10-08/s71008.shtmlhttp://www.sec.gov/comments/s7-10-08/s71008.shtml


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responsive to this change.104 This SEC rule-making was thus made in anenvironment ripe for change beneficial towards foreign private issuers.

F. The State of PlayThe regulatory landscape for foreign private issuers was substantially

reshaped by the time the SEC finished. Sure, the pesky requirement ofSarbanes-Oxley certification embodied in Section 404 could not beeliminated.105 But foreign private issuers coming to the United Statesfaced a regulatory skein where they could raise capital on the publicmarkets and if desired, escape relatively soon thereafter. Moreover, thiscapital raising was made significantly easier by the elimination of theU.S. GAAP reconciliation requirement.

In the past year and as the financial markets have healed, foreign privateissuers have returned to the United States. 13 initial public offerings byforeign private issuers have been announced raising 6.961 billion.106 Thiscompares to 47 domestic issuers raising 16.597 billion.107The source of

these issuers is now China and non-European issuers. 10 of these IPOswere from mainland China, 1 from Hong Kong, 1 from Singapore and 1from Brazil. None were from Europe.108 At first blush, this data providesaffirmation for the no one is coming here argument. But the LSE hadonly three IPOSs in total in 2009. The AIM had three IPOs in total forthe same year. In other words, no one at all was going to London109.Worldwide IPO flow had shifted to China primarily and the UnitedStates secondarily. The Hong Kong exchange had 21 IPO and theShenzen Exchange 40 IPOS.110 Meanwhile the NYSE had 34 IPOs andthe Nasdaq 26 IPOs.111

China may be dominating IPOS, but they are a result of the rise of its

domestic market. Given the penchant of issuers to raise capital in their

104 SEN. EVAN BAYH HOLDS A HEARING ON FINANCIALREGULATION, September 30, 2009 Wednesday, COMMITTEE: SENATECOMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS,SUBCOMMITTEE ON SECURITY AND INTERNATIONAL TRADE ANDFINANCE, LOAD-DATE: September 30, 2009. See also Jeffrey Deane & PeterKern, Ready for Global Financial Standards? PITTSBURGH POST-GAZETTE(PA.), Mar. 22, 2009, at C-1.105 The SEC did act to provide some measure of regulatory relief to smallissuers. See Internal Control over Financial Reporting in Exchange Act PeriodicReports of Non-Accelerated Filers and Newly Public Companies, Exchange ActRelease No. 33-8731, [2006 Transfer Binder] Fed. Sec. L. Rep. (CCH)

_______ (Aug. 9, 2006).106 Thomson Reuters107Id.108Id.109 Thomson Reuters Year-End Equity Capital Markets Review 2009 at 7,http://financial.thomsonreuters.com/deo/pdf/Prelim_Capital_Markets_Press_Release_4Q09.pdf. Moreover, there has been a flight of foreign issuers from theAIM of late.110Id.111 Thomson Reuters.
http://financial.thomsonreuters.com/deo/pdf/Prelim_Capital_Markets_Press_Release_4Q09.pdfhttp://financial.thomsonreuters.com/deo/pdf/Prelim_Capital_Markets_Press_Release_4Q09.pdfhttp://financial.thomsonreuters.com/deo/pdf/Prelim_Capital_Markets_Press_Release_4Q09.pdfhttp://financial.thomsonreuters.com/deo/pdf/Prelim_Capital_Markets_Press_Release_4Q09.pdfhttp://financial.thomsonreuters.com/deo/pdf/Prelim_Capital_Markets_Press_Release_4Q09.pdf


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domestic markets, this is to be expected.112 The U.S. is the onlycompetitor right now for foreign listings. In the past year, the U.K.received no foreign listings, Japan no foreign listings and the DeutschBorse no foreign listings.113 To the extent there is a global listing market,the United States still dominates it however small that market hasbecome.114

If you believe that the need for European issuers to come to the UnitedStates is now diminished due to either a lower premium or maturation oftheir own markets, these statistics superficially support that view.European issuers are not listing generally, but they are certainly notchoosing to list in the United States when they do. Moreover, issuers arecross-listing less than they previously did.115 This may be due to theinevitable maturation of European markets and the recognition that theU.S. market no longer has rents with respect to European issuers. It alsomay be due to bubble like conditions in prior years which overly inflatedthis flow. In this mix are U.S. regulations and a litigation environmentwhich many believe deters these listings. However, if you believe the

bonding hypothesis, or perhaps a hot money theory, Chinas U.S. listingwave appears to provide evidence to meet either one. Chinese issuers arecoming to the U.S. to raise capital and list.

These Chinese issuers are undertaking U.S. IPOs using U.S. GAAPprepared financial statements.116 This is despite the fact that China haspublicly announced its endorsement of IFRS and convergence. In otherwords, the market still values U.S. GAAP. It also may be a counter-vailing narrative to the drive or need to allow IFRS or otherwise push forglobal accounting harmonization. In some instances, Chinese issuers areeven filing for IPOs using the much more stringent domestic form of S-1rather than F-1, presumably for extra credibility.117 This is grist for the

bonding story and the value U.S. regulation and supervision hashistorically provided to foreign private issuers. Nonetheless, the numbersare too few to draw any definitive conclusions.

III.Analysis112See Sergei Sarkissian, The Overseas Listing Decision: New Evidence ofProximity Preference, 17(3) REV.FIN.STUD. 769 (2004).113World Federation of Exchanges,http://www.world-exchanges.org/statistics/annual. [Need to get statistics]114Langevoort argues that it doesnt matterwhat the data says, the fact is thatthe United States no longer has a significant competitive advantage vis--vis

other world markets in terms of technology, talent, or access to global wealth. Inother words, the United States no longer has rents that can compensate for--andthus mask--any suboptimal regulation. Getting the regulatory balance right istherefore increasingly crucial. Donald C. Langevoort, U.S. SecuritiesRegulation and Global Competition, 3 VA.L.&BUS.REV. 191, 196 (2009).115 Confirm Weisbach says maybe not116See, e.g., Duoyuan Global Water Inc. Registration Statement on Form F-1,No. 333-___, at F-1 (Filed June 1, 2009).117 I discuss this type of behavior in my articleRegulating Listings in a GlobalMarket, supra note 5.
http://www.world-exchanges.org/statistics/annualhttp://www.world-exchanges.org/statistics/annualhttp://www.world-exchanges.org/statistics/annualhttp://www.world-exchanges.org/statistics/annualhttp://www.world-exchanges.org/statistics/annualhttp://www.world-exchanges.org/statistics/annual


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Wholesale SEC changes have made it quite easy now for foreign privateissuers to enter and exit the U.S. market. Professors Doidge, Karolyi andStulz find 73 firms voluntary deregistered from the United States fromMarch 21, 2007 through 2008.118 Perhaps this is evidence of fleeing U.S.capital markets, but it may also just be pent up demand. Doidge and his

co-authors find evidence that these deregistering issuers grow moreslowly, need less capital, and experience poor stock return performancethan non-deregistering foreign issuers.119

Foreign securities regulation has still remained a one-size fits all affair.Royal Dutch Shell is regulated at the same level as Chinese DuoyuanGlobal Water, a 2009 hot Chinese IPO on the New York StockExchange. Royal Dutch Shell is also listed on the London StockExchange among others; Duoyuan Global nowhere else. In some sensethis has an administrative and market appeal. The administrative case isfor ease. A single standard is easier to administrate and sell to foreignprivate issuers. The market argument is that this allows the market to

demand or set varying levels of internalized governance and disclosure.For someone looking for a good empirical research piece, it would beinteresting to compare the market premiums of dual-listed versus single-listed foreign private issuers. This can be paired with a study comparingpremiums between established markets and emerging market foreignprivate issuers. In other words does Royal Dutch Shell receive the samepremium boost for bonding to the U.S. market as Chinese DuoyuanGlobal Water? My bet is no, but that is simply an educated guess.

This educated guess jibes with the legal terrain. The chances ofsuccessful litigation in the United States against a Chinese issuer are low.A judgment in the United States is of little value. You would likely have

to litigate the issue in China in courts that are unfamiliar and, to put itbluntly, often do not follow the rule of law.120 Nor are all foreign privateissuers the same with disclosure compliance. Despite the efforts of someChinese issuers, Chinese accounting principles are also an open joke.121Chinese issuers often keep multiple sets of books and fudge numbers tomeet internal targets.122 They do so safe in the assumption that it will allwork out in the end. One can believe that once they have to list in theU.S. and comply with U.S. regulations they get religion, and some

118 Craig Doidge, et al., Why Do Foreign Firms Leave U.S. Equity Markets? At14-15 (May 30, 2009), available at SSRN: http://ssrn.com/abstract=1415782.119 World Federation of Exchanges Statistics.120

See Donald C. Clarke, The Enforcement of United States Court Judgments inChina: A Research Note (May 27, 2004), GWU Legal Studies Research PaperNo. 236; GWU Law School Public Law Research Paper No. 236. Available atSSRN: http://ssrn.com/abstract=943922121See Mark Dixon,Another View: Tunneling to True Profit in China, N.Y.TIMES DEALBOOK, Aug. 17, 2009, available athttp://dealbook.blogs.nytimes.com/2009/08/17/another-view-shanghai-ed-profits/122See Cengage Learning Gale, Who's minding the minders of Chineseaccounting?, BARRON'S (Feb. 18, 2008).


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appear to do so, but I am skeptical that all do. A peruse of SEC filings bythese issuers also finds that their accounting practices are often suspect some fail to file cash flow statements; others raise cash while having asignificant amount of cash already on their balance sheet, a sign ofpossible fraud.123 A recent piece in Barrons on Chinese listings in theUnited States raised similar alarm at their accounting practices.124 This is

particularly true since the financials are prepared locally by Chinesebranches of U.S. firms with similar cultural norms.

In other words, foreign private issuers are different. A sensible cost-benefit analysis, even Aristotles principle of equality, would mediatethat there also be different regulation of the two. This would be trueunder other regulatory techniques such as investor protection or even anintegrity of the market analysis. I would thus suggest that if access to theU.S. retail market is provided to foreign private issuers then perhaps thelevel of regulation should be formally considered also. An appropriateimplementation of the precautionary principle jibes with this. The risk ofa foreign private issuer acting inappropriately or defrauding U.S.

investors likely mitigates some level of varying U.S. equivalentregulation. An illustration of this is occurring right now with Novartissattempt to squeeze-out the minority shareholders of Alcon. Alcon isorganized under the laws of Switzerland but listed only on the NYSE.Consequently, the Swiss Takeover Law and its minority protections donot apply, leaving Alcons shareholders without the protections theywould receive for either a U.S. or Swiss domestic entity. This is a fineexample of regulatory arbitrage amidst the current SEC rules for foreignprivate issuers.125

There are also certain issuers who pose more regulatory risk and analysisof that risk may require more regulation. But to date and in the many

releases issued in the past five years concerning international securitiesregulation, the SEC has not considered this issue, despite commentletters which noted this problem.126 I also presume the SEC staff at theOffice of International Affairs knows of these issues.

I believe that the SEC did not act to consider these differences for fourreasons. First, heightened regulation did not fit within the rubric ofcompetitiveness and globalization that was driving this deregulation.Increased regulation would have been an opposite turn and counter tothese concepts. Second, the scandal that drove this deregulation was theEnron/Worldcom debacle, the Sarbanes-Oxley response, and theregulatory and interest group push back. None of these provided a

narrative that supported heightened regulation of foreign private issuersdespite the fact that several significant scandals at the time involved a

123 Email from Hedge Fund Investor Arbitraging Chinese Issuers.124 Gale, supra note122.125SeeNovartiss Bid For Alcon: In the Eye: Minority shareholders in Swissfirms have fewer rights than they thought, THE ECONOMIST, Jan. 7, 2010.126See Comment Letter of Steven M. Davidoff, dated June 23, 2008, available athttp://www.sec.gov/comments/s7-10-08/s71008-16.pdf.


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foreign private issuer. Third, the interest groups promoting this reform,supported by certain influential members of Congress- were looking forderegulatory actions. Raising regulation of foreign private issuers wouldnot appear responsive to the demands of these interest groups. It wasonly in the context of the Cross-Border release, when these interests wereabsent, that the SEC felt the ability to more freely act to preserve a stance

that heightened regulation. Finally, path dependency appears to play asignificant role here. Having set a one-size-fits-all legal regime,breaking free of that treatment would have required a political event tojustify it, something that not only was lacking but the forces for politicalchange were heading the opposite direction.

I certainly agree that it can be argued that the SEC simply didnt concurwith my thinking. While this argument is currently unknowable, the factis that the path for foreign private issuers cleared in the past decade hasbeen primarily deregulatory. The most significant actions have come inthe wake of rhetoric and interest group politics that pushed for thesemeasures. It is very doubtful that, in light of these pressures and the

SECs reaction, that the SEC would have implemented these measureseven if they agreed with my conclusions.

IV. Conclusion

A disclaimer. This essay is not an argument in support or against theSECs regulatory actions with respect to foreign private issuers. I thinkthat many of the steps taken are sensible and certainly supportable in aworld of global capital and diminishing U.S. rents from New Yorkscapital perch, though the market seems to provide some support forpreservation of U.S. GAAP accounting.127 This latter point is anargument for a flexible regulatory regime with issuer choice above

minimum regulatory levelsan argument I put forth in my 2007 article Regulating Listings in a Global Market. Rather, my point is that thisambitious rule-making agenda was not driven by any normativeregulatory technique but rather the political rhetoric of the time. Thisrhetoric was reflected in the SECs rationale for its rule adoptions.

It is further evidenced by the SECs failure to fully considercountervailing interests. Instead, the interests of contrary parties such asretail investors were transformed so that the benefits to them increased access were emphasized rather than the possible detrimentssuch as lesser protection and disclosure. This was possible because theseinterestsunlike in the small issuer debate were largely unrepresented

in this rule-making. The SECs strong actions here were further justifiedas acting outside the small issuer context to support and enhance U.S.competitiveness in a manner responsive to public criticism. The end

127See Langevoort, supra note 114, at 106. Bill Bratton also in this symposiumoutlines many of the problems with IFRS adoption by U.S. issuers. Some ofthese are applicable in this instance. William W. Bratton,Heedless Globalism:The SEC's Roadmap to Accounting Convergence.


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result may or may not have been correct or apply appropriately, but theprocess did not allow for nuanced analysis.

So what, you may ask? You may argue that the rhetoric of competition isreal, and in any event the SEC arrived at the right result. I would arguethat this conclusion is problematic for a number of reasons. First, the

SEC appears to be picking and choosing interest group motivations aswell as regulating to the strength of these interests. Yet, shiftingrationales like this undermine the legitimacy of this regulation. It alsosubjects SEC rule-making to statutory challenge as the APA contains anarbitrary and capricious standard that the SEC risks violating . JosephGrundfest has recently highlighted the SECs shifting positions in thecontext of proxy access in his articleThe SEC's Proposed Proxy Access Rules: Politics, Economics, and the

Law128 to put forth just such an argument. Second, regulation

promulgated in this manner defies the purpose of independent regulatoryagencies which is to set law in response to its mandate and the publicinterest. I recognize this is particularly optimistic view of the world, but

suggest that other regulatory techniques such as cost-benefit analysismight provide more uniformity and perhaps more socially optimalresults, or at least more particular ones.129 Here, I talk about rigorouscost-benefit analysis, not the ex post facto back of the envelopecalculations the SEC appears to have employed recently in theinternational regulatory sphere. Finally, the analysis herein is portable toother SEC conduct in prior years. It could be applied to hedge fundregulation; Sarbanes-Oxley implementing regulation; or upcomingproxy-access regulation.130 If one were to watch the discourse, the samehortatory terms tend to repeat themselves and the same blunt forceregulation appears to follow.

Even at broad brush basis the results are clear. True revolutionary, path-dependency breaking regulation does not come until there is scandal.131The rhetoric drives the reform; rhetoric driven by a political economystory.132 In the mix SEC regulation crowds out Congressional regulation;

128 Rock Center for Corporate Governance at Stanford University WorkingPaper, No. 64 / Stanford Law and Economics Olin Working Paper, No. 386(November 2009).129For one SEC Commissioners view of cost-benefit analysis see Speech bySEC Commissioner: Remarks at "The SEC Speaks in 2009" byCommissioner Troy A. Paredes Securities and Exchange CommissionWashington, D.C. (Feb. 6, 2009), available at

http://www.sec.gov/news/speech/2009/spch020609tap.htm.See also EdwardShe

sec's regulation of foreign private issuers

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