In the US last week, new developments highlighted the increasing momentum for real reform of the regulation of the US capital markets. These developments should ultimately help make life easier for non-US companies, and others, seeking to raise money in the US.
US GAAP going, going . . .
Late last week, the SEC voted unanimously to propose amendments to disclosure requirements for non-US securities issuers, allowing them to use financial information prepared according to the English version of IFRS (International Financial Reporting Standards) when communicating with the US investing public. In the past, non-US issuers have had to produce costly and time-consuming reconciliations of their financial information to US GAAP. Under the proposed amendments, the reconciliation requirement would disappear for users of English-style IFRS. The proposed amendments should soon appear in written form, at which point a timetable for adoption should be provided (expectation: FY 2009).
Later this summer, the SEC is expected to consider the further step of allowing US securities issuers to drop US GAAP in favor of IFRS. Such a move might eventually lead to the virtual elimination of US GAAP for public companies, and encourage even more widespread use of IFRS around the globe.
Mutual recognition coming, coming . . .
Two weeks ago, the SEC convened a roundtable meeting of regulators and industry representatives to discuss how a new regulatory model of “mutual recognition” might give non-US brokers, exchanges and other financial intermediaries greater and easier access to US investors. Under mutual recognition, the SEC would allow certain types of non-US financial intermediaries to provide services to investors in the US, provided those entities are supervised in a non-US jurisdiction under a sufficiently rigorous regulatory regime. The roundtable is an early step in the SEC’s process of developing the mutual recognition concept, but has followed quickly from the first mention of the idea by an SEC official just a few months ago.
Investor lawsuits curbed
Late last week, the US Supreme Court issued a ruling that strongly favors defendants, including securities issuers, placing and underwriting banks and others, in the uniquely American high-stakes arena of private securities lawsuits. The Court tightened the pleading requirements for plaintiff investors seeking to claim that a defendant acted deceptively in a securities transaction. Under the ruling, securities fraud plaintiffs must plead facts that are “cogent” and “compelling” when alleging that a defendant acted with a culpable state of mind. Moreover, the existence of “plausible nonculpable explanations for the defendants’ conduct” can defeat the claim. A claim should survive only if a reasonable person would find the inference of a culpable state of mind “cogent and at least as compelling as any opposing inference of non-fraudulent intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd (see related eUpdate).
The ruling makes it harder for plaintiffs in securities lawsuits to maintain their claims beyond their initial assertion in a US court. This is of crucial importance to defendants. Why? Typically, it is only after a securities claim survives the pleading stage that a court will allow it to become a class action. And it is at that point that the risks and costs of defending against the claim can mount to notoriously high levels. Thus, the Tellabs ruling gives defendants in US courts a new tool for defeating securities claims before they become too big to contest.