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Panelists Debate Proposal To Allow EU Issuers To Make U.S. Offerings Without Registration

On the road to mutual recognition of foreign securities regulatory systems by the world's regulators, Citi Markets and Banking general counsel Edward Greene has offered a radical proposal --allow well-known European issuers to make public offerings in the U.S. or other EU jurisdictions using home country registration, disclosure and accounting standards. For offerings in the U.S., this would mean the European issuers would not have to register or comply with Sarbanes-Oxley Act requirements, and could use IFRS instead of U.S. GAAP. Greene outlined his proposal in a paper delivered to the SEC Historical Society, and presented the idea at the Society's recent annual meeting.

Greene proposed that the SEC implement a pilot program that initially would be limited to issuers meeting certain size and reporting history criteria agreed to by U.S. and EU regulators, possibly similar to the SEC's "well-known seasoned issuer," or WKSI, designation. The criteria would ensure that the issuers have a wide following in the marketplace and are subject to scrutiny by investors, analysts and others. One possible condition to the arrangement, Greene said, could be the existence of an MOU between the SEC and the relevant foreign regulator.

The advantages to the proposal, in his opinion, are enhanced access for U.S. and EU investors to the securities of the largest foreign issuers, and greater access to capital for U.S. and EU companies. Greene also believes that the pilot program would be a good way for regulators to begin to work out the elements of a mutual recognition program, such as information sharing, enforcement cooperation and the delivery of foreign disclosure documents. Assuming the pilot is successful, the approach could be expanded to other jurisdictions and to other categories of issuers, he said.

Several panelists at the meeting questioned Greene about the proposal. General Electric's Craig Beazer said he liked the proposal as long as there is reciprocity in the EU for U.S. issuers. He asked Greene whether the EU would be resistant to giving WKSIs automatic access to its markets.

Greene said that he believes the EU will accept the idea, and noted that its Financial Services Action Plan contemplates that if disclosure is comparable, then issuers can use their home country disclosure. There is goodwill and good relations between the U.S. and the EU, he added, and he sees the two jurisdictions achieving equivalence and consolidated supervision in the future.

Cleary Gottlieb partner Alan Beller said that comparability of disclosure is one of the toughest issues facing regulators as they consider mutual recognition. Like Greene, he fears that the issue will become politicized. Any definition of comparability in disclosure depends on accepting one global set of accounting standards, Beller said. He and Greene agreed that the world's regulators must move to one accounting system.

It is likely to be U.S. GAAP that withers away, Beller said, because over 10 to 25 years, global market capitalization is going to move inexorably out of the U.S. He urged the SEC to get to the end of its harmonization roadmap sooner rather than later. "The sooner we do, the sooner we will get an honest place at the table debating IFRS," he said. "When it happens, others will be less resentful of the U.S. taking a position on IFRS."

The NASD's Elisse Walter said that Greene's proposal raises many questions in the areas of implementation, interpretation and enforcement. She expressed concern about how much emphasis is being placed on the quality of disclosure as the answer to a mutual recognition system.

Greene acknowledged that there are many issues with his proposal that would need to be worked out between the U.S. and the EU, including agreeing upon which liability and market misconduct regimes should apply to transatlantic offerings under the program. In the area of enforcement, he believes that regulators' powers should be enhanced. An important question to be considered, he said, is whether regulators will have the power to freeze assets on behalf of their foreign counterparts.

Greene said that the U.S. and other jurisdictions must acknowledge that the time has come to give up nationalistic models and embrace a new global model of securities regulation. Although the SEC and other regulators should tread cautiously in order to ensure that fundamental investor protections are not lost in the name of global progress, he concluded, they must continue to move forward and demonstrate a willingness to be open to different regulatory approaches.

John Filar Atwood