Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, January 11, 2007

So what to make of easier de-registration rules for ADR’s?

Against a backdrop of falling US competitiveness in winning new foreign listings, the SEC has unveiled 2 proposals.

First, it has proposed a change to the means by which foreign private issuers can terminate their registration from related SEC reporting obligations. The main difference will be that companies’ ability to deregister would be
determined primarily on the basis of the trading volume of its securities in the United States. This would replace the current obligation which generally only permits a foreign private issuer to deregister if it can determine that it has less than 300 worldwide record holders of its securities or less than 300 beneficial holders resident in the United States.

On the surface, this would make it easier for foreign companies to close down their ADR programmes. After all, an estimated 60-70% of all European exchange traded ADR issuers have less than 5% of their trading volumes through their ADR, meaning that, in theory at least, companies can exit soon.

So will they do so? As ever, these things are not as simple as they appear. For a start, issuers many reasons for having their DR in the first place, such as supporting a local US presence, which have nothing to do with the liquidity of the ADR.

However, some may choose to change their ADR to trading over the counter, not through an exchange, which allows them exemption from Exchange Act reporting. This exemption has also been changed, allowing issuers to satisfy the obligation to supply the disclosures made in their home market, by posting them on their internet sites. Since the vast majority of issuers already do this, it should be no burden.

Second, the SEC has implemented its proposed delay to the obligation for foreign and smaller domestic US issuers to meet the obligations of the notorious Section 404, requiring management's assessment and an auditor's attestation to management's assessment on the effectiveness of the filers' internal control over financial reporting in their annual reports.

Neither on its own is a significant roll back of rules sufficient to encourage more listing, however they are perhaps straws in the wind of change.


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