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The SEC has announced that it will ease the rules locking overseas companies into having to comply with Sarbanes-Oxley regulations. In a series of announcements about modifying the implementation of Sarbanes-Oxley, including advice to auditors and further concessions to small US businesses, the SEC has significantly changed the conditions which tie overseas companies into a long-term US listing – the "Hotel California" situation*.
Currently, overseas companies, who have raised capital through secondary US flotations, cannot delist from the US exchanges as long as there are 300 US investors holding these shares. This has tied these companies to complying with Sarbanes-Oxley requirements and dissuaded other companies from locating secondary capital calls in the US. The proposal from the SEC is that these companies may now delist if the average daily trading volumes in the US are less than 5% of the volumes in that company’s primary market. The estimate is that 28 percent of the 1,200 overseas private issuers in the US would be eligible to deregister under the new proposal, which is seen as a simpler solution than any based on nationality of shareholders. This change is unlikely to affect the large companies such as BP, Barclays, etc who are already Sarbanes-Oxley compliant, but will be seen as beneficial to many small companies that listed in the US in the dotcom boom. This change could take effect as early as the end of Q1 2007.
Last week, the SEC commissioners voted unanimously to propose new guidance for the interpretation of Section 404 rules by injecting the notion of materiality into compliance, to adopt a "risk-based" approach, and to advise auditors to focus their internal controls assessments on "those controls that are needed to prevent or detect material misstatement in the financial statements".
Also last week, small US companies received an early Christmas present from the SEC when the regulator extended the Sarbanes-Oxley compliance deadline for management assessment of internal controls, Sarbanes-Oxley Section 404, by five months to fiscal years ending on or after December 15, 2007, and their auditor attestation deadline to years ending on or after December 15, 2008. Originally, the deadlines for both requirements was July 15, 2007.
*"Hotel California" was recorded by US group, the Eagles, who, in 1976, sang "We are programmed to receive. You can checkout any time you like, but you can never leave!"
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