As we continue our reform of our disclosure and auditing processes, we need to consider how any changes we make will affect foreign as well as domestic issuers and investors. The Sarbanes-Oxley Act makes no distinction between US and foreign private issuers listed in the United States. It applies equally to all who seek to access US capital markets. We are committed to implement the Act in a manner fully consistent with its purpose and intent.
Some have called on us to exercise our broad exemptive authority to limit the impact of Sarbanes-Oxley on foreign issuers. We have general exemptive authority under the statutes that we administer. We have used it wisely to permit sensible regulation under, for example, the Securities Exchange Act of 1934, to take account of changes in markets, technology, and other factors over the 68 years since that Act was adopted. No one should believe, however, that as a pragmatic matter, similar latitude exists to use exemptive authority broadly in the case of legislation that was enacted with unmistakable clarity of purpose about 68 days ago.
Our mandate is to implement the Sarbanes-Oxley Act fully for all companies, both foreign and domestic. Foreign companies therefore can expect that many of our new rules will apply to them. But we are prepared to consider how we can fulfil the mandate of the Act through our rulemaking and interpretive authority in ways that accommodate the home country requirements and regulatory approaches of the home jurisdiction of our foreign registrants and potential registrants. As we proceed with implementing the Act, we will therefore also seek a better understanding of any conflicts that may exist, as well as their potential resolution.
If a foreign company considered a US listing before Sarbanes-Oxley, neither the Act nor our rules implementing it should dissuade the company from going ahead now. Yes, there will be new disclosure and other requirements, but the SEC as an institution, and I personally, desire to make it inviting for global business to offer and list their securities in our markets.
I am confident that the US markets will emerge stronger and with greater transparency and comparability among listed companies.
In the case of the scope and integrity of disclosure, I believe that Sarbanes-Oxley calls for us to continue our long-standing policy. Basic disclosure standards have been made and will generally be the same for US and foreign issuers that access our markets. I believe that this approach is commonly accepted as part of the international capital markets. Markets generally have been thought to Act consistently with their legitimate interests when they impose disclosure standards in connection with listings or offerings in their markets. This philosophy extends to certification of disclosure or other procedures to ensure the integrity of disclosure.
In implementing Sarbanes-Oxley, we are mindful of the accommodations that we have made consistently to foreign private issuers in our disclosure regime. For example, we require that such issuers file annual reports but otherwise leave the timing of interim disclosures by these issuers to home country requirements. Our newly adopted rules regarding certification evidence a continuation of this philosophy.
There’s a number of provisions of the Sarbanes-Oxley Act that go beyond disclosure. It introduces federal law and the commission into a number of areas of corporate governance and internal corporate activity in ways that are new. Examples include requirements for an audit committee of independent directors for listed companies and prohibitions on loans extended or arranged by a company to its officers and directors.
The audit committee provisions in particular could have a potentially broad impact on internal corporate governance practices of reporting companies.
For example, the Act includes provisions designed to strengthen the role of audit committees. By April 26, 2003, we must adopt rules directing US markets to prohibit listing securities of any issuer not in compliance with new standards of audit committee responsibility and independence.
Under these standards, an issuer’s audit committee must be composed of independent directors and must be directly responsible for the appointment, compensation and oversight of the issuer’s audit firm. The committee also must establish procedures for handling complaints regarding accounting or internal control matters of the issuer, including confidential methods for addressing concerns raised by employees. Many foreign jurisdictions don’t require issuers to have audit committees, although some are studying their possible use.
Also, some countries, such as Germany, require that employees, who would not be viewed as ‘independent’ under the Act, serve on the supervisory board, whose responsibilities include audit oversight functions.
We are aware of the fact that requirements such as these can come into conflict with internal corporate structures and legal requirements in home jurisdictions of foreign private issuers. Some of the requirements for audit committees under Sarbanes-Oxley may go beyond or conflict with local requirements. More subtly, some of the abuses addressed by the Act may be addressed in other jurisdictions in different ways from those required or mandated by the Act.
We have begun the process of dialogue with foreign issuers and regulators, and we will continue that effort. A very important part of our rulemaking processes involves the comment process. It’s not only required by US law, but is also a crucial element in allowing us to get our rules right. It’s a public and transparent process that allows communication between our commission and all interested parties. Foreign issuers have often been reluctant to participate in that process. In the case of the proposed rules implementing the Sarbanes-Oxley Act in particular, I urge foreign companies and their advisors to comment on our rule proposals and to let us know when our proposals conflict with local law or local stock exchange requirements, or where problems that proposals are intended to address are addressed in alternative ways in other jurisdictions. Our final rules may not always address your concerns, but we do promise to listen, and carefully evaluate them, and do our best to harmonise the application of our rules with foreign sovereign requirements.
All of us must consider changes in our markets in a global context. While we will not, and cannot, always share the same vision on every issue, there’s much we can learn from one another, and much that requires us to work together. To facilitate that effort, I am considering providing an SEC presence here in Europe, so our dialogue can take place day in and day out, and we can truly work together and learn from one another.
The cooperative spirit that has served us so well in the past must be our guiding principle as we marshall our collective resources to meet the challenges that lie ahead.
- This is an excerpt from his speech made last week Wednesday to the European Union in Brussels.