The Far Eastern Economic Review Illuminates the Global Implications Of Strengthened SEC Disclosure Requirements

(Washington, D.C.): The 21 June issue of the Far Eastern Economic Review featured an insightful article by Murray Heibert on the new disclosure requirements unveiled by the Securities and Exchange Commission on 8 May 2001. Mr. Heibert describes the angst these requirements are generating in European and Asian financial quarters and thoughtfully addresses possible attendant political and economic repercussions.

As Mr. Heibert notes, however, the SEC has made clear its view that these proactive disclosure measures — dubbed “process biases” — make no political judgments and are not intended to keep foreign registrants who are doing business in countries off-limits to U.S. firms from raising funds in the American capital markets. They are, instead, designed simply to protect investors via the disclosure of new material risk factors that have emerged in the natural course of market developments.

Accordingly, the danger that capital controls will emerge from the SEC actions is overstated. If anything, had the Securities and Exchange Commission failed to take these steps to ensure greater transparency in our equity and debt markets, it would almost certainly have encouraged imposition by the legislative branch of the sorts of controls favored by neither would-be foreign registrants nor the William J. Casey Institute.

Newly tightened disclosure requirements could make it harder for capital-hungry Asian companies to gain access to U.S. financial markets. The Securities and Exchange Commission, the regulatory body that protects U.S. investors, on May 8 informed Congress that it would increase disclosure conditions for companies listing in the United States and doing business with countries affected by American sanctions.

The SEC decision was prompted by a vigorous campaign mounted by U.S. human-rights, religious-freedom and national-security groups, labour unions and environmentalists opposed to foreign firms doing business in war-ravaged Sudan. A year ago, this coalition pressed giant pension funds and institutional investors to boycott a New York share offering by PetroChina, whose parent company had invested in Sudan’s oil industry. Partly as a result, PetroChina raised only $2.9 billion, way below its $10 billion target.

In a letter to Rep. Frank Wolf, chairman of a congressional subcommittee overseeing the SEC, acting Chairman Laura Unger said the SEC would require companies to declare if they have business operations in countries in which American firms are barred from investing. These countries include Iraq, Iran, Libya, Sudan, North Korea and Burma. Unger said the SEC wasn’t trying to prevent companies from listing; it was just demanding disclosure to protect U.S. investors.

Activists who fought last year’s PetroChina listing are convinced the new ruling played a role in convincing China just a week later to float its $1.5 sovereign bond issue in Europe rather than in the U.S. “The lines between traditional financial-risk considerations and U.S. foreign-policy/national-security concerns have been blurred,” says Roger Robinson, chairman of the Casey Institute of the Center for Security Policy and an adviser in the Reagan administration. Robinson was a leading organizer of the PetroChina coalition.

The most immediate impact of the SEC ruling will be on America’s Asian and European allies whose companies do business in countries restricted by Washington. Oil companies are the most active in these U.S.-restricted markets. Disclosure of links to such countries as Iraq or Iran could hobble their ability to raise money in the U.S. equity and bond markets. But American institutional investors, analysts and economists are sharply divided in their views of the SEC’s move. “From an institutional investor’s standpoint, it’s unambiguously good,” argues Steven Schoenfeld, who heads international equity management for Barclays Global Investors in San Francisco. “Investment managers will have more information about a company. They’ll want to know if countries in which they’re investing are unstable or rogue states.”

But others believe the SEC’s move could lead to future political meddling in financial markets. “I think it’s the thin [end of the] wedge of using capital markets as a sanctions tool,” says Gary Hufbauer of the Washington-based Institute for International Economics. “The next step will be to say that foreign companies doing business in these countries can’t come in with a new IPO, secondary offering or bond offer. Transparency is the first step to barring them completely.”

Others worry that the new regulations will harm U.S. investment banks. “It’s just going to hurt the competitiveness of the U.S. for international issues,” says Fred Hu, managing director at Goldman Sachs in Hong Kong. “If the SEC . . . takes this too far and listings get mixed up with politics, companies have other choices,” Hu says. He fears that American banks “could lose business” to their competitors in Europe and Asia.

Besides PetroChina, the impact on other Chinese companies seeking to list in New York will be indirect. Not many Chinese companies are trying to list in the immediate future and few have investments in so-called rogue states. Many of the big firms that have touted foreign listings–Bank of China, Air China and China Telecom–are still busy restructuring their companies. Nonetheless, analysts believe the new regulations will create an atmosphere of suspicion about Chinese firms and a presumption that they are withholding key information.

The PetroChina coalition remains active and open to expanding its lobbying efforts to include concerns about China’s human-rights problems and arms proliferation. Robinson says Chinese companies “associated with proliferation or egregious human-rights abuses” may face “future legislative efforts.”