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The New York Stock Exchange (NYSE) has recently made a proposal that would permit the trading on U.S. exchanges of a limited number of large foreign firms. The Shadow Financial Regulatory Committee endorses this proposal as a way of relaxing the burdensome Securities and Exchange Commission (SEC) restrictions on the trading of foreign securities in the United States.
SEC regulations continue to restrict the trading of foreign securities in the United States, however, putting at risk the position of the United States as a preeminent global capital market. The most onerous of these restrictive regulations is the requirement that foreign companies may not sell or list their securities on U.S. exchanges or NASDAQ unless they agree to reconcile their financial statements to U.S. generally accepted accounting principles (U.S. GAAP).
The practical impact of the SEC requirement is that very few foreign companies sell or list their securities in tile United States. Although there are over 2,000 foreign companies that apparently meet NYSE listing standards, only 155 are traded on a U.S. exchange or NASDAQ. Some foreign firms trade in the United States without reconciling to U.S. GAAP, but only if their securities trade in the "pink sheets"--an illiquid segment of the over-the-counter market where there are few quotes and no last-sale reporting, and where investors face much higher costs and spreads.
The NYSE proposes that about 200 of the largest and best-known foreign companies be allowed to see and list their securities in the United States without having to reconcile their financial statements to U.S. GAAE These companies all meet substantial revenue and market capitalization requirements and are traded actively outside the United States. The NYSE proposes that they be allowed to file in the United States their independently audited, home-country financial statements as long as they include a written explanation of the material differences between home-country accounting practices and U.S. GAAE
The committee endorses this proposal as a reasonable first-step in reconciling U.S. disclosure standards with global competitive realities. On December 16, 1991, the Shadow Financial Regulatory Committee issued a statement (No. 78) calling for the Securities and Exchange Commission to reduce regulatory obstacles to the listing of foreign companies on U.S. stock exchanges.
The proposed step would have several benefits. It would be consistent with recent SEC proposals to lessen the regulatory burden of disclosure for emerging U.S. companies. It would also bring U.S. regulatory practices more into linewith those of other major capital markets. U.S. companies may now issue stocks and list them on exchanges in Japan and in Europe without conforming to local rules of accounting, even though U.S. financial statements are not prepared in accordance with Japanese or European principles.
Nor would exempting world-class foreign companies from U.S. GAAP reconciliation undermine investor protection in the United States. There is little reason to expect that requiring foreign companies to file additional U.S. GAAP reconciliations (in most cases long after their home-country documents have been made public) will be of value to U.S.
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The New York Stock Exchange (NYSE) recently announced plans to attract foreign companies to list their stocks on the NYSE. With the increased globalization of securities markets, the NYSE and other U.S. exchanges are facing stiff competition from foreign exchanges. In the last few years the NYSE has