The Securities and Exchange Commission should allow only foreign securities with a “broad market following” to be traded by U.S. investors under a mutual recognition regime, according to a top SEC official. The official said the minimum threshold should be companies with a global market capitalization of at least $700 million.
John W. White, director of the SEC’s Division of Corporate Finance, said last week in a speech in London that the SEC could use the market-cap definition of well-known seasoned issuers, or WKSIs, as the basis for deciding which foreign companies’ securities can be accessed directly by U.S. investors through foreign exchanges or brokers. The SEC defines WKSIs as large issuers with either $700 million in worldwide market cap or $1 billion in non-convertible securities issued in the last three years.
“Mutual recognition” is the SEC’s plan-in-progress to make U.S. investor access to foreign markets easier. According to current SEC discussions about mutual recognition arrangements, “foreign brokers and exchanges from selected jurisdictions would be allowed to operate in the U.S. without registration under certain circumstances,” White said on Wednesday in San Diego. Mutual recognition, he added, is “premised in large part on a determination that a foreign regulatory regime provides comparable protections and results to those afforded to U.S. investors under our securities laws.”
Currently, foreign securities offered in the U.S. to investors must be registered in the U.S. and traded on a registered U.S. exchange. Institutions are able to trade foreign securities abroad or through U.S. brokers with foreign affiliates, while retail customers can trade foreign securities primarily through foreign brokers. However, going through foreign intermediaries increases the cost of trading those stocks, according to the SEC.
White’s proposal doesn’t go as far as NYSE Euronext would like. In mid-2007, the exchange group suggested that the SEC allow all foreign securities traded on exchanges in jurisdictions approved for mutual recognition to be accessible to U.S. investors. “My short list would be we should go forward with mutual recognition of [companies’] registration statements,” said Catherine Kinney, president of NYSE Euronext, at an SEC-sponsored roundtable on mutual recognition last June. However, the SEC’s top corporate finance official appears disinclined to go that route.
White added that the SEC should also curtail U.S. investor access to new issues. “It would also seem appropriate, again at least initially, to limit access to those companies with an established track record of stock trading and public disclosure, such as those that have been public for at least a year or six months,” White said at last week’s Practicing Law Institute conference in London.
White noted that the SEC has so far focused on exchanges and brokers in its discussions about mutual recognition. Standards for issuers should also be part of the discussion, he said. In his view, there should be “comparability of issuer disclosure,” including annual disclosure documents. White also said the SEC should consider corporate governance and issuer standards, such as whether foreign companies–or the home country regulator or exchange–require foreign companies to treat U.S. investors “equally with home country investors, or equally with other foreign investors.”