In strong moves to reduce the burden of securities regulations, the Securities and Exchange Commission proposed rules yesterday to make it easier for foreign companies to get out from under such regulations, and an advisory panel proposed guidelines that would exempt 80 percent of American companies from having to fully comply with the Sarbanes-Oxley Act.
The moves sent a signal that regulators were worried about complaints made by many companies regarding costs. SEC Chairman Christopher Cox said he hoped new rules would encourage foreign companies to list in the United States, since they would know it would be relatively easy to leave if they chose.
The proposed rules, which could be changed after public comments are received, stopped well short of a request by a large group of European companies that they be able to deregister if their trading volumes in the United States were low.
"There are companies that have relatively low U.S. trading volume, but relatively high U.S. ownership," said Alan Beller, the director of the commission's division of corporate finance, adding that those companies should remain registered.
The recommendation on the Sarbanes-Oxley provision came from the SEC's advisory committee on small business. It voted to ask the SEC to allow most companies with market values of less than $700 million to avoid having their internal controls certified by auditors.
The vote was 18-1. The dissenting member, Kurt Schacht, executive director of the CFA Centre for Financial Market Integrity, said, "It is clear that we need to do something for small companies, but giving them a pass on any verification and oversight of internal controls will come back to haunt us."
Regarding domestic companies, the advisory committee recommended that most of them with market capitalizations under $100 million be totally exempted. And it recommended that companies with market capitalizations of $100 million to $700 million not face audits of internal controls. Some companies with large revenues but low market values would still be required to comply with the act.
That proposal went well beyond what some had anticipated. While all American companies with market values of more than $75 million have complied with Section 404 of the act, which requires managements to assess internal controls and auditors to report on whether the controls are adequate, the SEC delayed its application to smaller companies.
Overall, the changes would ease or remove the Section 404 requirements for about 80 percent of public companies, although those companies together account for only about 6 percent of the market value of American companies.
Regarding foreign companies, the proposed SEC rule would allow them to leave if less than 5 percent of the trading volume of their stock takes place in U.S. markets, but only if less than 10 percent of the shares are owned by residents. If the figure is less than 5 percent, the company may leave the market no matter how large the volume.