Unintended Consequences?

The Effect of Sarbanes Oxley on Global Capital Markets

presented by

International Business Law Committee

Section of Business Law

American Bar Association

March 17, 2007 – Spring Meeting – Washington, D.C.

36735

Unintended Consequences?

The Effect of Sarbanes Oxley on Global Capital Markets

March 17, 2007

Table of Contents

List of panel members

Bios

Outline Intended and Unintended Consequences of the Sarbanes-Oxley Act

James F. Duffy Trends in Cross-Border Listings

Reid Feldman Unintended Consequences? The Effect of Sarbanes-Oxley on International Capital Markets – Chronology of a Debate

Denis T. Rice Unintended Consequences – The Effect of Sarbanes-Oxley on International Capital Markets

Peter G. Smith Flight from “Over-Regulation”? U.S. Securities and Exchange International Registered and Reporting Companies as Commission of December 31, 2005 – Market Summary

Unintended Consequences?

The Effect of Sarbanes Oxley on Global Capital Markets

presented by

International Business Law Committee

Section of Business Law, American Bar Association

List of panel members

Chairman and Moderator: Reid Feldman Partner Kramer Levin Naftalis & Frankel LLP Panelists: Paul Dudek Chief of the Office of International Corporate Finance Securities and Exchange Commission James Duffy Executive Vice President and General Counsel, NYSE

Regulation New York Stock Exchange Denis Rice Director Howard Rice Nemerovski Canady Falk & Rabkin Peter Smith Partner Kramer Levin Naftalis & Frankel LLP Alain Tchernonog General Secretary Veolia Environnement

Paul M. Dudek Mr. Dudek has been Chief of the Office of International Corporate Finance at the U.S. Securities and Exchange Commission since 1993. He joined that office as an Attorney Fellow in 1990. Prior to that, he was with the New York Office of Cleary, Gottlieb, Steen & Hamilton where his practice involved representing a wide range of foreign and U.S. companies and financial intermediaries in capital markets transactions. The SEC’s Office of International Corporate Finance is responsible for the development and implementation of rule-making initiatives and interpretive policies of the Commission pertaining to offerings by foreign issuers in the United States and multinational offerings by foreign and domestic issuers. The Office also serves as the central point of contact for foreign companies that are planning to register their securities with the SEC. Mr. Dudek is a graduate of the New York University School of Law (Order of the Coif) and Fordham University (Phi Beta Kappa). In 2001, Mr. Dudek received the SEC’s Philip A. Loomis, Jr. Award and in 2005, under Mr. Dudek’s leadership, the Office of International Corporate Finance won the SEC’s Regulatory Simplification Award. Mr. Dudek is an Adjunct Professor of Law of Georgetown University School of Law and has served as an Adsjunct Porfessor at the Osgoode Hall Law School of York University (Toronto), teaching courses on global securities offerings.

James F. Duffy James F. Duffy is an Executive Vice President and the General Counsel of NYSE Regulation, Inc. Since joining the New York Stock Exchange in 1999, Jim has been extensively involved in both domestic and international listings matters, market regulation and market structure issues. Jim was centrally involved in the formulation of the Exchange’s expanded corporate governance listing standards, and in the changes to the Exchange’s own governance structure as well. Previously, Jim served for ten years as General Counsel of the American Stock Exchange. Earlier he practiced corporate and securities law on the legal staff of GTE Corporation, and with the firm of Lord, Day & Lord in New York.

Reid Feldman Reid Feldman is a partner in the law firm of Kramer Levin Naftalis & Frankel LLP, resident in its Paris office. He has been engaged in the practice of law in France and in the United States for many years, and has broad experience in general corporate matters; insurance and reinsurance; finance; and litigation (including arbitration). He has handled numerous French and cross-border acquisitions, restructurings and other corporate and financial transactions. Mr. Feldman is a member of the bars of Paris and Washington, D.C. He received his education at Columbia University (B.A.), Yale Law School (J.D.; member, Yale Law Journal) and Oxford University (M. Litt.). Past presentations and publications by Mr. Feldman include: “Sarbanes-Oxley Act et ses suites: Bilan de l’application aux Etats-Unis et en Europe” (EFE, October 2006); Corporate Governance Trends and D&O Insurance” (FERMA, October 2004); “Corporate Governance in Cross-Border M&A: Setting Up the Merged Entity” (ABA, August 2004); “Corporate Restructuring and Mobility – the EU Legal Context” (YLS Symposium on Assessing Corporate Law Reform in a Transatlantic Context, October 2003); “Negotiating the Acquisition of a Privately Held Company” (ABA International M&A Institute – Doing Deals: North American and European Perspectives, October 2002); “Legal issues Arising from Recent Celebrated Shareholders Rights Battles in France” (ABA, April 2002); “Mener à bien l’acquisition à l’amiable d’une entreprise américaine,” FUSIONS & ACQUISITIONS, October 1998; and LES ASPECTS JURIDIQUES DES AFFAIRES AUX ETATS-UNIS (CFCE, 1990). Mr. Feldman serves on the Board of Advisors of the Yale Law School Center for the Study of Corporate Law and is a member of the European Corporate Governance Institute (ECGI), the ABA International Business Law Committee (co-chairman, European Subcommittee) and the ABA Negotiated Acquisitions Committee (member, International Transactions Task Force).

Denis T. Rice Denis Rice is a founding director of Howard Rice and practices in a broad range of legal areas. His experience includes corporate and securities matters, Internet and e-commerce law, including startups, venture capital, corporate finance and intellectual property issues, financial institutions, complex litigation, dispute resolution and international transactions. He has handled U.S. investments in India, China, Mexico and Europe. He handled the first public offering of a motion picture on the Internet in 2003. Mr. Rice has litigated complex cases (including class actions) in state and federal courts involving securities fraud, fiduciary duties, corporate governance, proxy contests, antitrust, trademarks and trade secrets. He has served as special counsel to corporate boards and federal agencies on governance and securities issues and serves as an arbitrator for the World Intellectual Property Organization and the American Arbitration Association. Mr. Rice is the former Mayor of the Town of Tiburon and former President of the Marin Board of Supervisors. He was the founding chair of the California State Bar Committee on Cyberspace Law and serves on the Board of the International Technology Law Association. Education and Honors • J.D., University of Michigan Law School (Order of the Coif, Associate Editor,

Michigan Law Review) • A.B., Princeton University, Woodrow Wilson School of Public and International

Affairs (Phi Beta Kappa)

Peter G. Smith Peter G. Smith is a partner at Kramer Levin Naftalis & Frankel LLP in New York, specializing in corporate and securities law matters, with particular emphasis on U.S. and international acquisitions, joint ventures and financing transactions. Over the years his experience has ranged from structuring multi-billion dollar public tender offers and mergers to assisting investors, corporations and others in planning, financing and implementing leveraged buyouts and other acquisition programs, with a special focus on innovative strategies and structures. Mr. Smith also represents financial institutions, issuers and others in corporate restructuring and financing transactions, both public and private, and counsels public companies and their management on securities regulation and compliance matters. In addition to speaking and writing on a variety of corporate and securities law subjects, Mr. Smith recently served as Secretary of The New York City Bar Association’s Task Force on The Lawyer’s Role in Corporate Governance, and Chair of that Task Force’s Subcommittee on the Role of Outside Counsel. Mr. Smith graduated from Harvard College, A.B., cum laude, in 1975 and received his J.D. degree from Columbia University in 1978, where he was a Harlan Fiske Stone Scholar and an Editor of the Journal of Law and Social Problems.

Alain Tchernonog EDUCATION - Attorney (French CAPA) - Ph. D. International Law (Doctorat d’Etat en droit international) - Master of Business Administration (Institut d’Administration des Entreprises en

France) PROFESSIONAL EXPERIENCE - 1972 – 1974: International Lawyer – Centre National d’Etudes Spatiales (National

Agency for Space Activities) - 1974 – 1979: Head of Legal Department - National Agency for research promotion –

Agence Nationale de Valorisation de la recherche - 1979 – 1990: Director Contracts Department - Roussel Udaf - 1990 – 1995: General Counsel – Pierre Fabre SA - 1995 – 2000: General Counsel – CGEA - 2001 – 2006: General Counsel – Veolia Environnement - 2007 – General Secretary – Veolia Environnement Publications in various business law reviews

Intended and Unintended Consequencesof

the Sarbanes-Oxley Act

International Business Law Committee Program on “Unintended Consequences? The Effect of Sarbanes Oxley on Global Capital Markets”

March 17, 2007 American Bar Association Section of Business Law Spring MeetingWashington, D.C.

Consequences of the Sarbanes-Oxley Act

• Intended Consequences– Enhance financial reporting in the United

States– Enhance corporate governance in the United

States– Promote investor confidence in the United

States

Consequences of the Sarbanes-Oxley Act

• Perhaps Unintended Consequences– Enhance financial reporting on a global basis

• Global auditor oversight changes• Global auditor independence changes\

– Enhance corporate governance on a global basis

• Audit and other committees – Enhance investor confidence on a global

basis• Internal control requirements

• Perhaps Unintended Consequences (continued)– Securities Offering Reform in the United

States – 2005 implementation for offering changes for large cap issuers

– Greater focus on the costs of compliance with new regulations – Section 404

– Greater focus on the concerns of smaller companies – Advisory Committee, etc.

Consequences of the Sarbanes-Oxley Act

Consequences of the Sarbanes-Oxley Act

• Perhaps Unintended Consequences (continued)

– Desire by foreign registrants to delist and deregister from U.S. market, giving rise to the foreign deregistration rulewriting

– Desire by U.S. registrants to delist and deregister from the U.S. market, giving rise to the “going dark” phenomenon

Consequences of the Sarbanes-Oxley Act

• Perhaps Unintended Consequences (continued)– Focus on U.S. market competitiveness in a

global environment– Focus on “principles-based” regulatory

approach– Focus on use of International Financial

Reporting Standards by foreign companies– Focus on U.S. corporate governance

shortcomings

Consequences of the Sarbanes-Oxley Act

• Perhaps Unintended Consequences (continued)

– New constituencies involved with the rule-writing process

• Foreign companies, foreign governments• PCAOB

– Focus on a “new institutional framework”?

International Business Law CommitteeProgram on

“Unintended Consequences: The Effect of Sarbanes Oxley on Global Capital

Markets”

March 17, 2007

Trends in Cross Border ListingsJames F. Duffy

EVP & General CounselNYSE Regulation, Inc.

2

Foreign Private Issuers are Increasingly Cautious About Registering in the United States

From 1996-2002, NYSE averaged 51 international listings per year.

From 2003-2006, that average declined to 21.

In 2006, only two of the 25 largest IPOs in the world chose to register and list in the United States; both are domestic companies.

3

25 Largest IPOs in 2006

Issuer Name Total Amount Raised ($Mil) Exchange

Industrial & Commercial Bank of China - ICBC 21,928.7 Hong Kong/ShanghaiBank of China Ltd 11,185.9 Hong KongRosneft 10,656.2 London/MoscowKKR Private Equity Investors LP 5,048.8 Euronext AmsterdamStandard Life plc 4,443.9 LondonLotte Shopping Ltd 3,738.4 London/KoreaAozora Bank Ltd 3,218.2 TokyoSaras SpA 2,642.7 MilanMasterCard Inc 2,579.3 NYSEChina Communications Construction Co Ltd 2,378.9 Hong KongPetroplus Holdings AG 2,318.2 ZurichKazMunaiGas Exploration & Production 2,255.4 London/KazakhstanMW Tops Ltd 2,001.7 Euronext AmsterdamCairn India Ltd 2,001.6 Bombay/NSEChina Coal Energy Co Ltd 1,945.3 Hong KongDebenhams Ltd 1,923.6 LondonDaqin Railway Co Ltd 1,878.3 ShanghaiAP Alternative Assets LP 1,856.9 Euronext AmsterdamReliance Petroleum Ltd 1,831.5 Bombay/NSESymrise AG 1,775.6 FrankfurtAeroports de Paris SA 1,760.0 Euronext ParisSNS Reaal Groep NV 1,723.5 Euronext AmsterdamSpirit Aerosystems Holdings Inc 1,647.0 NYSEExperian Group Ltd 1,492.0 LondonWacker Chemie AG 1,450.0 Frankfurt

4

Capital Raising Developments

In 2006, 244 non-US IPOs raised US$ 149 billion globally.

204 of these IPOs (representing 92% of the capital raised) included a Rule144A tranche.

147 of these 204 companies listed only on their home market, 35 listed on a non-domestic exchange, either exclusively or in addition to their

home market, and 22 Chinese companies listed on HKEx.

5

Rule 144A

0

20

40

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1999 2000 2001 2002 2003 2004 2005 200650

55

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144A IPO Value Public IPO Value 144A as % of Total Value Raised

No. ofIPOs 173 249 53 66 56 161 220 244

6

Trading

In 2006, US investment in non-U.S. equities reached a record $3.9 trillion (23.9% of all US equity holdings) up from $1 trillion (10%) in

1996.

In 2006, the U.S. share of trading in NYSE-listed non-U.S. companies was 16.3%, down from 30% in 1996.

7

Trading

05

101520253035404550

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20060%

5%

10%

15%

20%

25%

30%

35%Worldwide Avg Daily Value (left scale)U.S. % of Total (right scale)

Numberof stocks 249 303 341 363 408 431 435 429 433 420 410

Sources: NYSE, Reuters, Bloomberg, FactSet

8

Listings Competition

LSE advertises that non-US companies considering listing on a US exchange believe that the demands of SOX make listing on the LSE more attractive.

The NYSE is increasingly competing with the LSE and HSE for emerging market listings (in Russia and China particularly), while local exchanges are

increasingly listing their domestic global IPOs.

9

Listings CompetitionForeign Stocks Listed on NYSE, London and Nasdaq

0

100

200

300

400

500

600

1983

1985

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1991

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1995

1997

1999

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2007

*

NYSE London Nasdaq

2000 2002 02/07NYSE 434 473 451London 501 419 317Nasdaq 488 381 324

* as of Feb. 28Source: Exchanges, WFE

10

Listings Competition

NYSE 2006Company Country Market Cap. ($mm) IPO Value ($mm)

Grupo Aeroportuario del Pacifico SA - GAP Mexico 1,178 1,003 Transportes Aereos Meridionales SA - TAM Brazil 2,917 795 Genesis Lease Ltd Ireland 720 737 Qimonda AG Germany 4,528 628 AerCap Holdings NV Netherlands 1,956 600 Ternium SA Argentina 4,111 543 Security Capital Assurance Ltd Bermuda 1,411 481 Allied World Assurance Holdings Ltd Bermuda 2,093 344 Mindray Medical International Ltd China 1,427 311 Banco Macro Bansud SA Argentina 1,266 307 WNS (Holdings) Ltd India 756 255 North American Energy Partners Inc Canada 698 222 Danaos Corp Greece 1,146 215 Aegean Marine Petroleum Network Inc Greece 527 201 Arch Capital Group Ltd. (PFD) Bermuda 207 177 Teekay Offshore Partners LP Bahamas 206 169 New Oriental Education & Technology Group Inc China 546 129 Trina Solar Ltd China 402 107

11

Listings CompetitionLSE (Main Market) 2006

Company Country Market Cap. ($mm) IPO Value ($mm) 144ALotte Shopping Ltd South Korea 4,370 3,738 XComstar UTS OAO Russia 3,030 1,062 XTrader Media East Ltd Netherlands 650 565 XKingdom Hotel Investments - KHI United Arab Emirates 1,589 399 Goldenport Holdings Inc Greece 286 115 Cherkizovo Group Russia 904 251 Rosneft Russia 70,563 10,656 XNapo Pharmaceuticals Inc United States 67 22 Aer Lingus Group plc Ireland 1,442 940 XKazMunaiGas Exploration & Production ZAO Kazakhstan 6,200 2,255 XA&D Pharma Holdings NV Romania 507 173 XPlaza Centers NV Netherlands 961 311 XTMK Russia 4,714 1,090 XSistema-Hals ZAO Russia 2,103 432 XHochschild Mining plc Peru 2,071 577 XChelyabinsk Zinc Plant OAO Russia 853 368 XBank of Georgia Georgia 456 160 INA Industrija Nafte dd Croatia 3,034 501 XShalkiyaZinc Kazakhstan 410 105 Rolta India Ltd India 448 90 XHana Tour Service Inc South Korea 686 69 XSeverStal Russia 12,100 1,063 XOil & Gas Development Co Ltd (OGDCL) Pakistan 7,883 811 XInvestcorp Bank Bahrain 2,100 421 XHalyk Bank Kazakhstan 4,397 748 X

12

Listings CompetitionHong Kong (Main Market) 2006

Company Country Market Cap. ($mm) IPO Value ($mm) 144ALingbao Gold Co Ltd China 128 128Good Friend International Holdings Inc China 41 10Yorkey Optical International (Cayman) Ltd China 227 65 XNine Dragons Paper (Holdings) Ltd China 1,753 504 XGolden Eagle Retail Group Ltd China 758 210 XChina National Building Material Co Ltd China 703 267 XHunan Nonferrous Metals Corp Ltd China 670 263 XAdvanced Semiconductor Manufacturing Corp - AS China 316 96 XShanghai Prime Machinery Co Ltd China 371 187 XDalian Port (PDA) Co Ltd China 929 321 XDBA Telecommunications (Asia) Holdings Ltd China 162 47Tianjin Port Development Holdings Ltd China 412 161Bank of China Ltd China 92,646 11186 XJilin Qifeng Chemical Fiber Co Ltd China 189 51 Shimao Property Holdings Ltd China 2,397 551 XFortune Sun (China) Holdings Ltd China 27 10 Greentown China Holdings Ltd China 1,375 395 XJutal Offshore Oil Services Ltd China 71 20 China BlueChemical Ltd China 1,075 393 XShui On Land Ltd China 2,928 879 XSmart Union Group (Holdings) Ltd China 34 10 SPG Land (Holdings) Ltd China 615 177 HannStar Board International Holdings Ltd China 300 78 NagaCorp Ltd Cambodia 381 106 Industrial & Commercial Bank of China - ICBC China 131,835 21929 XTiande Chemical Holdings Ltd China 52 13 Aupu Group Holding Co Ltd China 112 37 China Communications Services Corp Ltd China 1,539 420 XZhaojin Mining Industry Co Ltd China 1,188 324 XShanghai Jin Jiang International Hotels (Group) C China 1,648 358 XChina Communications Construction Co Ltd China 8,762 2379 XKingdom Holdings Ltd China 140 39 China Coal Energy Co Ltd China 6,114 1945 XZhuzhou CSR Times Electric Co Ltd China 739 282 XHaitian International Holdings Ltd China 1,014 203 XXingda International Holdings Co Ltd China 509 176 X

13

The Perfect Storm

Sarbanes-Oxley internal control compliance costs. Perceived increased liability.

Lack of accounting convergence.Significant increase in Rule 144A offerings.

Increased depth of home markets.Heightened delisting/deregistration interest.

Significantly, the US now appears to understand the need to address these issues.

Unintended Consequences?The Effect of Sarbanes-Oxley on International Capital Markets – Chronology of a Debate

Reid FeldmanKramer Levin Naftalis & Frankel LLP47, avenue Hoche75008 Paris, Francetelephone: + (33) 1 44 09 46 03fax: + (33) 1 44 09 46 01rfeldman@kramerlevin.com

March 17, 2007

Some contributions to the current debate

Nov. 20, 2006 Remarks by U.S. Treasury Secretary Henry M. Paulson on the Competitiveness of U.S. Capital Markets

Nov. 30, 2006 Interim Report of the Committee of Capital Markets Regulation (Co-chairs: Glenn Hubbard & John L. Thornton)

Dec. 22, 2006 SEC’s reproposed rule on termination of a foreign private issuer's registration of a class of securities under Section 12(g) and duty to file reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934

Winter 2007 Ethiopis Tafara & Robert J. Peterson, “A Blueprint for Cross-Border Access: A New Institutional Framework,” 48 Harv. Int’l L.J. 31 Winter 2007, with commentaries

Jan. 22, 2007 Bloomberg/Schumer (McKinsey), Sustaining New York’s and the US’ Global Financial Services Leadership

Jan. 24, 2007 Remarks by SEC Chairman Christopher Cox: Re-Thinking Regulation in the Era of Global Securities Markets

Jan. 31, 2007 Remarks by President George W. Bush on the State of the EconomyMar. 6, 2007 Remarks by E.U. Commissioner Charlie McCreevy: Shifting up a gear –

Transatlantic cooperation in financial servicesMar. 14, 2007 Report of the U.S. Chamber of Commerce Commission on the Regulation of U.S.

Capital Markets in the 21st Century

1

Remarks by U.S. Treasury Secretary Henry M. Paulson on the competitiveness of U.S. capital markets

Excerpts:Our capital markets are the deepest, most efficient, and most transparent in the world. We are the world's leader and innovator in mergers and acquisitions advice, venture capital, private equity, hedge funds, derivatives, securitization skills, and Exchange Traded Funds.

We responded to the corporate scandals with the Sarbanes-Oxley Act of 2002, new listing rules for public companies, and regulatory and legal enforcement actions to alter certain business practices. . . . [Q]uestions are being raised about the long-term impact of these changes.

Does the decline in initial public offerings in U.S. capital markets signal potentially broader challenges to our competitiveness? . . . Despite our strong economy and stock market, IPO dollar volume in the U.S. is well below the historical trend and below the trend and activity level in a number of foreign markets.

Moreover, existing public companies in the U.S. are deciding to forgo their public status – with its attendant regulatory requirements – and go private. This is occurring in record numbers, at record volumes, and, as a percentage of overall public company M&A activity, is approaching levels we have not seen in almost 20 years. This development is being facilitated by ever-growing private pools of capital.

Determining the causes and potential effects of these trends is more complicated. Are they temporary, harmless phenomena, or more like the coal miners' canary? What is the implication for America's investors and our existing public companies, which remain subject to the new regulatory standards? And what does this mean for America's economic competitiveness?

Truly competitive capital markets must inspire investor confidence. They must be fair and they must be perceived to be fair. Of course, fairness does not guarantee success. Laws and regulation cannot prevent investors from losses, nor should they attempt to do so. We should not discourage risk taking, but we should make sure that investors have reliable information on which to base their decisions.

When it comes to regulation, balance is key. And striking the right balance requires us to consider the economic implications of our actions. Excessive regulation slows innovation, imposes needless costs on investors, and stifles competitiveness and job creation. At the same time, we should not engage in a regulatory race to the bottom, seeking to eliminate necessary safeguards for investors in a quest to reduce costs. The right regulatory balance should marry high standards of integrity and accountability with a strong foundation for innovation, growth, and competitiveness.

2

Interim Report of the Committee of Capital Markets Regulation

Excerpts:[T]he evidence presented here suggests that the United States is losing its leading competitive position as compared to stock markets and financial centers abroad.

Regulatory intensity almost inevitably increases after periods of market euphoria and the subsequent market collapse. The question is: “Has the shift in intensity gone too far?”

It is the Committee’s view that in the shift of regulatory intensity balance has been lost to the competitive disadvantage of U.S. financial markets.

Key recommendations:1. [T]he SEC and self-regulatory organizations (“SROs”) should engage in a more risk-based process, focused explicitly on the costs and benefits of regulation. To the

extent possible, regulations should rely on principles-based rules and guidance, rather than the current regime of detailed prescriptive rules.

2. While applauding the reforms enacted by the Sarbanes-Oxley Act of 2002, we conclude that the private litigation system needs modification in some dimensions and that the criminal enforcement system needs better balance.

greater clarity to private litigation under Rule 10b-5, as regards the definition of materiality and other matters

criminal enforcement against companies, in light of the experience of Arthur Andersen, should truly be a last resort reserved solely for companies that have become criminal enterprises from top to bottom

[careful examination of} the case for caps on liability or safe harbors to prevent the failure of another auditing firm, while at the same time providing that responsible individuals are held fully accountable.

3. [T]here is a danger that the United States, compared with other countries, is falling behind best practices in shareholder rights.the right to approve poison pills in companies with staggered boards

majority rather than plurality voting by shareholders

access to the director nomination process

alternative dispute resolution mechanisms such as arbitration (with or without class actions) or judge-conducted trials

4. Implementation of Sarbanes-Oxley. We recommend no statutory changes in the Sarbanes-Oxley Act, including Section 404. Investors have benefited from the stronger internal controls, greater transparency, and elevated accountability that have resulted from this new law. However, we do believe that the implementation of SOX 404 by the SEC and the PCAOB, together with the prospect of catastrophic liability faced by auditors, has produced a regime that is overly expensive. The same benefits can be produced at lower cost. We conclude that there need to be changes to SOX 404 implementation, including a redefinition of materiality, more guidance from the PCAOB, and multi-year rotational testing permitted within an annual attestation.

3

SEC’s reproposed rule on deregistration and duty to file reports

Excerpts:We believe the reproposed rules will provide foreign private issuers, regardless of size, with the meaningful option of terminating their Exchange Act reporting obligations when, after electing to access the U.S. public capital markets, they find that there is relatively little U.S. investor interest in their U.S.-registered securities. As a result, foreign private issuers should be more willing initially to register their securities with the Commission, to the benefit of U.S. investors who will have more investment choices.At the same time, we believe the conditions that determine a foreign private issuer's eligibility to terminate its Exchange Act registration and reporting under reproposed Rule 12h-6 will serve to protect U.S. investors.

For example, the prior reporting condition is intended to provide investors with at least one complete year's worth of Exchange Act reports, including an annual report, upon which they can base their investment decisions about a particular foreign registrant before it exits the Exchange Act reporting system. The dormancy condition is designed to deter a foreign private issuer's promotion of U.S. investor interest through recent registered capital-raising before exiting our reporting system. The foreign listing condition and U.S. trading volume benchmark support our view that, before a foreign private issuer may terminate its Exchange Act reporting obligations under Rule 12h-6, it must be subject to an ongoing disclosure and financial reporting regime, and have a significant market following, in its home market. The condition restricting the ability of an issuer to rely on the trading volume standard under specified circumstances should deter an issuer from excluding U.S. investors, particularly retail investors, from investing in their securities when U.S. market interest is still significant. The immediate availability of the exemption under Rule 12g3-2(b) would foster access by U.S. investors to ongoing home country information about an issuer after it terminates its Exchange Act registration and reporting under Rule 12h-6. Finally, the conditions relating to the filing of Form 15F and the publication of a press release or other notice would promote transparency in the exit process.

4

E. Tafara & R. J. Peterson, “A Blueprint for Cross-Border Access: A New Institutional Framework,” 48 Harv. Int’l L.J. 31 (Winter 2007), with commentaries

Excerpts:With a few exceptions, the SEC has been reluctant to permit foreign issuers and foreign financial service providers to access the U.S. capital market, without submitting to direct SEC oversight, for a number of legal, economic and organizational reasons.

concerns that permitting foreign access without direct SEC oversight would result in unknown risks to investors and the U.S. capital market by making it more difficult for the SEC to detect market fraud or potential prudential risks. fear that foreign access to U.S. investors on terms substantially different from those imposed domestically would place U.S.-registered firms and issuers at a competitive disadvantage vis-à-vis their foreign-registered counterparts . . . [and] lead to regulatory arbitragecould make it difficult for U.S. investors to compare different investment optionssignificant political risk exists for the SEC should a major financial scandal at an unregistered foreign entity operating in the United States result in large losses to a significant number of American retail investors

Whereas most earlier U.S. federal securities laws had focused on disclosure, Sarbanes-Oxley (and its foreign counterparts) have delved more deeply into corporate governance, auditor oversight, and other matters bearing directly on overseeing the quality of the disclosures issuers make. . . . The combination of these regulatory changes has created a new set of international issues with which the SEC and other securities regulators must contend. . . . [C]orporategovernance, auditor oversight requirements, and prudential regulatory approaches, for example, vary widely among jurisdictions, respecting differences in culture, legal systems, and market structure. For a transnational issuer or investment bank, addressing these kinds of regulatory discrepancies can be difficult and costly.Arguably, the current system of overlapping, repetitious or even contradictory obligations imposed on foreign stock exchanges and broker-dealers operating in the United States increases transaction costs for U.S. investors while offering only marginal improvements in investor protection. [A new framework relying] on a system of substituted compliance with SEC regulations . . . should greatly reduce the transaction costs investors currently pay when investing overseas, and allow the current situation of overlapping and duplicative registration and oversight requirements for certain stock exchanges and broker-dealers to end.[A] new model for international cooperation between the SEC and certain like-minded foreign securities regulators should:

facilitate the SEC’s ability to protect U.S. investors;lead to a collaborative effort in promoting high-quality regulatory standards in a globalized market;increase competition in financial services — both here and abroad — and lower cross-border transaction costs, to the benefit of investors around the world;directly benefit U.S. investors by providing them with greater investment opportunities at lower costs, while offering them greater protections against cross-border fraud;[strengthen] capital formation in the United States . . . by increasing competition among financial service providers in the U.S. market.

5

Bloomberg/Schumer (McKinsey) – Sustaining New York’s and the US’ Global Financial Services Leadership

Excerpts:The threat to US and New York global financial services leadership is real: in the highly lucrative investment banking and sales and trading businesses, European revenues are now nearly equal to those in the US …. It is clear that the country and the City need to take this threat seriously. In so doing, it is crucial to separate the effects of the natural maturing of foreign markets, which is an extrinsic phenomenon beyond the control of US policy makers, from the more intrinsically sourced practices and conditions that make the US and New York less competitive, and which are well within policy makers’ power to influence.Domestic drivers of competitiveness that policymakers can influence

Skilled people: New York’s lead over London . . . may be under threat. . . . US immigration policies are making it harder for non-US citizens to move to the country for education and employment.Legal environment: Survey respondents . . . felt that the US was at a competitive disadvantage to the UK. . . [attributed to] a propensity toward litigation and concerns that the US legal environment is less fair and less predictable than the UK environmentRegulatory balance: UK’s single, principles-based financial sector regulator . . [perceived] as superior to what [is seen] as a less responsive, complex US system of multiple holding company and industry segment regulators at the federal and state levels. Regulatory enforcement style also matters . . . Recent US legislative and regulatory action such as . . . [implementation of Sarbanes-Oxley, Basel II and US accounting standards compliance] Act, also put the US at a competitive disadvantage. . .

Recommendations:Critically important near-term priorities 1. Provide clearer guidance for implementing the Sarbanes-Oxley Act.2. Implement securities litigation reform.3. Develop a shared vision for financial services and a set of supporting regulatory principles.Initiatives to level the playing field4. Ease restrictions facing skilled non-US professional workers.5. Recognize IFRS without reconciliation and promote the convergence of accounting and auditing standards.6. Protect US global competitiveness in implementing Basel II.Important longer-term national priorities7. Form a National Commission on Financial Market Competitiveness.8. Modernize financial services charters.

6

Remarks by SEC Chairman Christopher Cox: Re-Thinking Regulation in the Era of Global Securities Markets

Excerpts:[A] globalized marketplace offers not only benefits to investors, but potentially significant risks as well. And those risks can threaten notonly investors, but our entire economy . . . [T]he threat comes from the increasing opportunities for fraud, unethical trading practices, and market manipulation . . ..

It is the job of national regulators to wade into this fray. . . after all, there’s no global regulator who can do the job for us.

[S]ome of the old ways of doing things are obsolete. For example, while our historical justification for having issuers, broker-dealers and exchanges register with the SEC is sound, it may be that by working with like-minded foreign counterparts we can find ways to lower costs and increase opportunities for investors while still maintaining the highest standards of investor protection.

[C]onsider the global reaction to the Sarbanes-Oxley Act. There has been loud complaint about its costs, even by some in other jurisdictions to whom it does not apply. But one interesting effect of these reforms has been the degree to which they have been copied, in one form or another, in many other major markets.

[P]erhaps we’ll one day reach a point where it doesn’t matter whether a company’s financials are stated using US GAAP or International Financial Reporting Standards.

[T]he world’s governments are quickly coming to see that there is no “one true path” to securities regulation at any one point in time.

The way for the U.S. to maintain robust investor protections while building healthy international markets is first, to ensure that ourregulatory regime at home is . . . sturdy enough . . .; second, to ensure that our regulations are in every respect cost-justified; and third, to cooperate with fellow securities regulators abroad to implement agreed-upon regulatory objectives . . ..

[W]e must also continually reassess the costs and benefits of our regulations as they are actually applied.

7

Remarks by President George W. Bush on the State of the Economy

Excerpts:America's capital markets are the deepest, the broadest, and the most efficient in the world. Yet excessive litigation and over-regulation threaten to make our financial markets less attractive to investors, especially in the face of rising competition from capital markets abroad.

The principles of Sarbanes-Oxley are as important today as when they were passed. Yet complying with certain aspects of the law, such as Section 404, has been costly for businesses and may be discouraging companies from listing on our stock exchanges.

We don't need to change the law. We need to change the way the law is implemented. America needs a regulatory environment that promotes high standards of integrity in our capital markets, and encourages growth and innovation.

I'm pleased of the progress that Hank Paulson and Chairman Chris Cox are making to make sure the regulatory burden is not oppressive, and fair, and helps us meet a great national objective to keep the United States the economic leader in the world.

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Remarks by E.U. Commissioner Charlie McCreevy: Shifting up a gear – Transatlantic cooperation in financial services

Excerpts:Regulation of course is essential. Without it there would be no confidence in a capital market. Without confidence there would be no investment and without investment there would not be a market. So we need regulation: good, slim-line, principles-based regulation. Prescriptive, rules-based, heavy-handed regulation has no place in a market economy.

[W]e cannot and should not try to prescribe rules for every conceivable situation. . . . Trying to eliminate risk is not only impossible; it invariably leads to unintended consequences.

less innovation and growth

a false sense of security

moral hazard

reduced pressure on people to exercise their own judgment and to behave responsibly.

Much of the regulation that has been so damaging in recent times is that which imposes the heaviest burdens and restrictions on those who should need them least: those who are paid to - and should be able to – make sound judgments about what makes commercial sense, about what is the difference between right and wrong, about what will be the consequences of their actions - auditors, accountants, CEOs and company chairmen.

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Report of the U.S. Chamber of Commerce Commission on the Regulation of U.S. Capital Markets in the 21st Century

Excerpts:[T]he competitive position of the U.S. capital markets is declining in the context of heightened competition from international financial centers and a U.S. legal and regulatory system whose basic framework was established more than 70 years ago.

Principal recommendations:Reform and modernize the federal government’s regulatory approach to financial markets and market participants.

Give the SEC the flexibility to address issues relating to the implementation of the Sarbanes-Oxley Act.

Convince public companies to stop issuing earnings guidance or, alternatively, move away from quarterly guidance with one EPS number to annual guidance with a range of EPS numbers.

Seriously consider proposals by others to address the significant risks faced by the public audit profession from catastrophic litigation.

Retirement plan reform.

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Unintended Consequences?The Effect of Sarbanes-Oxley on International Capital Markets – Chronology of a Debate

Questions?

March 17, 2007

ABA

UNINTENDED CONSEQUENCES:THE EFFECT OF SARBANES-OXLEY ON GLOBAL CAPITAL MARKETSPanel of the International Law CommitteeABA Business Law SectionAnnual Spring MeetingWashington, D.C. — March 17, 2007Moderator: REID FELDMAN (Paris)Slides: DENIS T. RICE (San Francisco)

International Law Committee

ABA Spring Meeting

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ABAAlternative Investment Market (“AIM”)

• Launched in 1995 by London Stock Exchange

• As of 2006, lists 1600 issuers with total market cap of $140 billion

• Average market capitalization of listed issuers– NASDAQ: $1.1 billion

– AIM: $65 million

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ABAAnnual Costs of Being Listed

• NASDAQ: $2.3 million

• AIM: $900,000(NOTE that the annual costs include auditing and compliance)

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ABAU.S. Companies Listed on AIM

• As of June 2006: 51 issuers listed

• 17 of those issuers joined in 2006

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ABAIPOs in 2005:AIM vs. NASDAQ • Number of IPOs:

– AIM 335– NASDAQ 35

• Average IPO deal size:– AIM $18.7 million– NASDAQ $117.5 million

• Enterprise Value as Multiple (x) of Revenue:– AIM 6.3x– NASDAQ 4.7x

(Source: Prof. Dale Oesterle, Ohio State Univ. Law School)

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ABA

Wharton Study:198 companies delisted from U.S. exchanges in the year after passage of Sarbanes-Oxley (triple the previous year’s number)

Skouvakis Study:146 companies deregistered with SEC in 18 months after passage of Sarbanes-Oxley, compared to 97 in the 19 months before passage

1934 Act Deregistration:

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ABA

Russell Reynolds Associates “Europe Chairman Report” 2006:70% of chairmen of European companies not listed on U.S. Exchanges say Sarbanes-Oxley would dissuade them from seeking a U.S. Listing

NYSE Chairman Carter Congressional Testimony:• Only 5.7% of money raised by non-U.S. IPOs was raised

on U.S. exchanges in 2005, compared to 46.8% in 2000

• In 2005, only 35 foreign IPOs listed on U.S. exchanges, compared to 100 IPOs in 2000

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ABA

Some Delistings from NASDAQ Supposedly Due to Costs of Compliance with Sarbanes-Oxley

• 2004: Alternative Technology Resources, Inc. (California)

• 2005: Rank Group Plc. (England)

• 2005: Allen Organ Co. (Pennsylvania)

• 2007: American Bank Inc. (Pennsylvania)

• 2007: InfoVista (France/Virginia) (will stay listed on ParisEuronext)

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ABA

• 2006: TV Azteca (Mexico). Issuer did not mention Sarbanes-Oxley, but said “the Mexican capital and debt markets have become a robust source of financing in pesos, with considerable levels of liquidity for investors”

Delisting from NYSE

• 2006: FNX Mining Co., Inc. Issuer’s reasons: ASE listing did not increase U.S. trading volume or analyst coverage, plus “complexity of securities regulatory compliance in the U.S. and . . . administrative burdens and increasing costs . . . particularly in light of new Sarbanes-Oxley requirements.”

Delisting from ASE

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ABAIFAC’s 2007 Proposal:A Potential Equalizer?• International Standard on Auditing 580 (Exposure Draft

December 2006) would require all issuer officials who speak to auditors to sign a “management representation”

• Is this Sarbanes-Oxley Sec. 404 “through the back door”?

ABA Spring Meeting

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ABASEC Commissioner Kathleen Casey, Feb. 9, 2007:

“We need to fix 404. No other issue in recent times has come to symbolize regulation gone awry than this relatively modest-looking provision of the Sarbanes-Oxley Act. While the spirit and letter of the law never contemplated the costly and burdensome result that this provision has generated, the law’s implementation undoubtedly facilitated such a result.”

(Speech to “SEC Speaks” Conference in Washington, D.C.)

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ABA

The End

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ABA

Flight from “Over-Regulation”?

March 17, 2007

Peter G. SmithKramer Levin Naftalis & Frankel LLP1177 Avenue of the AmericasTelephone: (212) 715-9100psmith@kramerlevin.com

“AIM is the world’s leading market for smaller, growing companies from all over the world....AIM’ssuccess is built on a simplified regulatory environment which has been specifically designed for the needs of smaller companies.”

- London Stock Exchange

“The AIM rulebook is very small . . . . Put that up against the SEC and NASDAQ rules, and I know which market I would like to apply to.”

- Spokesperson for an AIM Nominated Advisor

“There is no way in a million years we will move to an insane regulatory system like Sarbanes-Oxley.”

- London Stock Exchange Spokesperson quoted inWall Street Journal Europe (December 20, 2006)

Performance of New AIM Listings – 2006

362 new companies raised £9.4 billion122 new international companies raised £4.7 billion17 US companies raised £448 millionShares of American AIM companies averaged 9.2% price declineShares of issuers from other countries averaged price increases of 2.1% (Cayman Islands) to 62.19% (BVI)Shares of UK, Australian and Canadian issuers averaged price increases of 15.64%, 20.06%, and 10.89%, respectively

Certain Listing Considerations Other Than Sarbanes-Oxley Regulatory Environment

Market profile and trading interest for smaller companies (for example, research suggests AIM is more liquid than NASDAQ for companies with market capitalization of £106 - £150 million ($190-285 million))Trading multiples, etc.Follow-on offeringsCosts other than regulatory compliance (including listing expenses as well as investment banking fees, etc.)Potential for earlier or more substantial sales by insidersLess frequent financial reporting

Alternatives for Capital Formation, Liquidity and Investor Exit Strategies in Face of Perceived Regulatory Burdens

Most analyses have focused on appeal of competitive non-US public markets (such as AIM)Other phenomena may include increased interest in one or more of the following:

Private placements of securities with no near- or medium-term commitment or plan to go publicStructural variations to access broader markets without public offering by individual issuersPreviously public reporting companies going “dark”with substantial number of shareholders

Alternatives for Capital Formation, Liquidity and Investor Exit Strategies in Face of Perceived Regulatory Burdens (cont.)

Previously public reporting companies going private with small number of shareholdersSales of private companies which might have considered going publicLeveraged recapitalizations or similar transactions by private companies which might have considered going public“Roll up” of companies for which regulatory burden is seen as excessive on an individual basis

Possible Countertrend in Certain Non-US Regulatory Developments?

New AIM Rulebook for NomadsNew responsibilities (believed to reflect existing good market practice)Due diligence before declaring issuer “appropriate”Nomad duty to act with due skill and care (with set of principles and activities)Duty to contact LSE immediately if concerns about appropriateness of AIM company after admissionLSE can direct actions of nomads in exceptional circumstances to preserve reputation/orderliness of AIMNomads to submit annual return to LSE

Possible Countertrend in Certain Non-US Regulatory Developments? (cont.)

UK Codification of Directors’ Duties, etc.Previously largely case lawCriticized as increasing administrative burden, leading to uncertainty until courts have considered statutes and developed new case law, etc.

International Standard on Auditing 580 (Exposure Draft) proposal includes management representation conceptUK Transparency Directive (January 2007)

Other Contrarian Observations

Foreign IPOs accounted for 16% of the 208 IPOs in the US in 2006 –the highest proportion in 20 years – and raised $10.6 billion of the $45.3 billion in US IPOs in 2006, or 23% of volume – the highest proportion since 1994

- Thompson Financial Study reported in Wall Street Journal Online (February 20, 2007)

Directors & Officers insurance premiums have declined steadily since 2004

- Advisen report

Since 2004, technology IPOs have risen 20% in the US, and declined 6% on AIM

- Barrons (January 1, 2007)

Market Sumary COUNTRY NYSE AMEX NMS CAP MKT OTC TOTALANTIGUA 1 1ARGENTINA 9 3 3 15AUSTRALIA 8 7 4 6 25AUSTRIA 1 1BAHAMAS 1 1 2BELGIUM 1 1 2BELIZE 1 1 2BERMUDA 15 7 7 29BRAZIL 34 1 5 40BRITISH VIRGIN ISLANDS 2 1 6 3 9 21CANADA 86 71 46 22 290 515CAYMAN ISLANDS 4 23 6 33CHILE 16 4 20CHINA 12 12COLOMBIA 1 1CZECH REPUBLIC 1 1DENMARK 2 1 1 1 5FINLAND 4 4FRANCE 18 9 3 30GERMANY 16 1 1 2 20GREECE 3 2 5HONG KONG 6 4 1 3 14HUNGARY 1 1INDIA 9 3 12INDONESIA 2 2IRELAND 3 5 1 3 12ISRAEL 3 1 62 10 10 86ITALY 10 1 2 13JAPAN 19 6 1 4 30KOREA 8 6 2 16LIBERIA 1 2 3LUXEMBOURG 3 5 2 10MARSHALL ISLANDS 5 4 1 10MEXICO 16 1 19 36NETHERLANDS 16 1 9 1 4 31NETHERLANDS ANTILLES 1 2 3NEW ZEALAND 1 1NORWAY 4 1 2 7PANAMA 2 2PAPUA NEW GUINEA 1 1PERU 1 1 2PHILIPPINES 1 1 1 3PORTUGAL 2 2RUSSIA 6 6SINGAPORE 6 6SOUTH AFRICA 6 3 9SPAIN 6 1 1 8SWEDEN 1 2 10 13SWITZERLAND 11 1 3 15TAIWAN 5 2 7TURKEY 1 1UNITED KINGDOM 45 14 3 26 88VENEZUELA 2 2 TOTAL 429 79 243 49 436 1,236