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Moves at S.E.C. to Loosen Rules on Many Companies
By Floyd Norris New York Times
Thursday, December 15, 2005

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, while an advisory panel put forward guidelines that would exempt 80 percent of American companies from having to comply fully with the Sarbanes-Oxley Act.

The moves sent a signal that regulators were worried about complaints made by many companies regarding costs. Christopher Cox, chairman of the S.E.C., 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 rule, 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 S.E.C.'s advisory committee on small business. It voted to ask the commission 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 to 1, with the dissenting member, Kurt Schacht, the executive director of the CFA Centre for Financial Market Integrity, saying, "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."

Backers of the proposal said the costs of compliance were too high. "We value internal controls strongly," James C. Thyen, chief executive of Kimball International and co-chairman of the advisory committee, said in a telephone interview. "We see the goodness in it, but we think there has to be some proportionality in costs versus benefits." Under the proposal, his company would no longer need to have its controls audited.

Regarding foreign companies, the proposed S.E.C. rule would allow them to leave if less than 5 percent of the trading volume of their stock takes place in United States 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.

Current S.E.C. rules make it very difficult for a company that chooses to register its securities in the United States to get out of the market. American officials have justified that by saying that investors who buy securities with the protections afforded by United States registration deserve to keep the protections while they own the securities.

Companies that took advantage of the new rule would have to publish financial statements in English and make them available on the Internet, the S.E.C. said.

S.E.C. officials said the rule change would end a major source of friction with foreign issuers. "It removes the image of shackles" that keep companies in the United States when they want to leave, said Raul Campos, a commissioner.

The concerns of foreign companies grew after the passage of the Sarbanes-Oxley Act in 2002, which requires companies with securities registered in the United States to have their internal controls audited. That requirement has been delayed for foreign issuers and for smaller American companies after it proved to be more expensive than expected.

The proposal from the small-business group 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 S.E.C. delayed its application to smaller companies.

The advisory committee recommended that most companies with market capitalizations under $100 million be exempted totally. 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.

Between them, 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.

Any such proposal could not take effect unless approved by the S.E.C. A commission spokesman declined to comment.