Much Ado About Nothing
As a partner at a firm that makes its living trading Nasdaq and NYSE-listed stocks as an agent for money managers, about the last thing I favor is anything that discourages companies from listing their shares in the U.S. But clearly, something currently is discouraging foreign companies from doing just that.
Until 2000, nine out of every 10 dollars raised by foreign companies through new stock listings were raised in New York, according to figures cited by SEC Commissioner Paul Atkins. But by 2005, the numbers had reversed - now, nine out of every 10 dollars are raised outside of the U.S. For example, U.S. capital markets recently stood idly by as the largest stock offering in history - China's ICBC - was being completed on the Hong Kong and Shanghai bourses. Further, we read story after story in the press about London's increasing prominence as a financial center and even about the success of the London Stock Exchange's (LSE) Aim market on our very own shores in the heart of our innovation belt - Silicon Valley. What is responsible for this dramatic shift?
SOX Bashing Is Only Half the Story
Since Sarbanes-Oxley (SOX) bashing is all the rage, I'll give it a swift kick while it's down, particularly its indiscriminately applied and costly Section 404 internal controls provisions. And I'll officially root for the success of new Treasury Secretary Henry Paulson and the private Committee on Capital Markets in creating momentum for potential change of the most onerous provisions of SOX that have perhaps swung the pendulum too far.
However, while SOX bashing may feel good, it oversimplifies the situation. Among other things, an unreformed, tough U.S. litigation environment; nonharmonized and inflexible accounting rules; higher U.S. investment banking fees; and non-U.S. factors, such as the growing maturity of international capital markets and regulatory structures, also are contributing to a deluge of foreign listings being reduced to a trickle in the U.S.
At the same time the vilification of SOX oversimplifies the reasons for listings flight, it also seems to be overcomplicating and confusing the issues surrounding looming transatlantic exchange consolidation. Put simply, the potential application of SOX and the U.S. regulatory structure to foreign exchanges in this opening round of consolidations is not something I fear, nor should companies listed on the Euronext or LSE, or their respective stakeholders.
In fact, I believe SOX is a red herring in this instance, put front and center by a combination of genuine misunderstanding over its potential application and intentional fear-mongering on the part of politicians and rival exchanges who wish to scuttle the currently contemplated deals. The SEC itself has attempted to dispel the misinformation by repeatedly stating that the types of integration currently being contemplated by the mergers would not result in mandatory registration of non-U.S. companies. And yet, the cacophony of voices expressing concerns continues, and deal structures are altered and complicated trust structures put forth to ensure the nonapplication of SOX and U.S. regulatory jurisdiction generally.
Recall that perhaps the chief rationale for the NYSE and Nasdaq acquiring foreign exchanges is to reverse the trend in foreign listings. That means these U.S. exchanges - for-profit entities now - are going to do everything in their power to structure deals to ensure that SOX does not apply to the European part of their operations.
Former SEC Commissioner Harvey Pitt has added to the confusion with comments stating that "by virtue of cross-border market consolidations, SOX will become the de facto standard of corporate regulation unless Congress acts." Nothing could be farther from the truth.
Mr. Pitt makes the same mistake that is repeatedly being made in debate on this matter. He seems to equate the term "single platform," of which the parties contemplating mergers speak, with a single market center or a single set of listings standards. If that is what was meant by the term, and the NYSE and Nasdaq were pursuing that in their respective pursuits of Euronext and the LSE, he would be dead-on right - SOX would, in fact, apply and be exported de facto.
However, NYSE Group CEO John Thain in particular has made crystal clear that this is not what he means by "platform." Instead, the platform relates to the technology on which the respective market centers will run, with the goal being one technology platform for equities for cost-savings reasons.
One technology platform, though, does not mean one market center with one set of rules, as some people seem to imply. In other words, maintaining a separate market structure for the NYSE's Hybrid, Arca and each of the Amsterdam, Brussels, Lisbon and Paris bourses - which, despite being under the Euronext banner and having certain harmonized rules, maintain a degree of separateness as part of the so-called federal model - is consistent with an integration of the platforms. Each might have different rules, order types, etc. (not to mention very different listings fees that the NYSE has little interest in harmonizing), but still can be run off the same technology base.