There is a tide of discontent rising in the City. From accountancy firms to financial investors, lawyers are resisting admitting to their clients that they should know the ins and outs of the Sarbanes-Oxley Act 2002. Already the U.S. Securities Act 1933 creeps into UK documentation for private equity investment funds, but how much longer will U.S. law unsettle the jurisdiction of UK qualified lawyers?
Over the last few weeks, several major events have catalysed the debate. Last week the news became public that the London Offices of Ernst & Young had been under investigation by inspectors from the US audit watchdog, the Public Company Accounting Oversight Board. Their investigations are empowered by the s.404 of the Sarbanes-Oxley Act.
More recently, Christopher Cox, chairman of the Securities and Exchange Commission, said:
While competitors in other countries are using Sarbanes-Oxley as a reason for foreign companies to list in the jurisdictions, many of those same countries are adopting provisions of the act as part of their own regulatory regime.
Does he dispell the fallacy? Not really. Just because some provisions (begging the question - which ones?) are being adopted does not mean that the Sarbanes-Oxley is not why foreign companies list in non-U.S. countries. Chris Cox has demonstrated the fallacy of composition.
The “Sarb-Ox” (as it is called, a name which echoes in the legal halls like a bad collision between a motorcar and a bull), requires the PCOAB to report on all audit firms that have more than 100 clients in the US stock markets. Staff at Ernst & Young have been interrogated (or interviewed) and audit documents have been scrutinised (or read).
KPMG are thought to be next in the firing line, followed by PwC and the fourth major accounting firm, which has not yet commented. One glimmer of hope is that the Financial Reporting Council is overseeing the investigations, and as an independent body has the UK ’s accountancy industry at the heart of its interests.
It may be incidental, but probably not, that last week Edward Balls, the Economic Secretary to HM Treasury, gave a speech on the possible takeover of the LSE by "a company outside the UK", i.e. Nasdaq, who already own 25% of LSE’s shares.
The government have promised not to intervene in the independent judgements of the FSA, and will legislate to enhance the FSA’s powers. The stated risk is that a new foreign owner would try to integrate the LSE with its existing business and the legal framework in its domestic country. If the domestic country is the U.S., the LSE may be smothered by having to answer to two masters, one being Sarb-Ox and the Securities Act, the other being the FSA.
The focus of the foreseen legislation is to enable the FSA to veto changes to the rules of any body recognised by s.18 of the Financial Services and Markets Act 2000 (including the LSE, Virt-C, ICE Futures, the London Meat Exchange and CREST). This veto may be exercised in "defined circumstances", which were not defined in Edward Balls' speech. Balls makes it clear that the right would be a right to veto and not a right of approval of rule changes.
Corporate Blawg UK suggests that the FSA should be consulted on all changes to LSE rules, or at the very least notified of them. There should then be a standstill period for the FSA to consider any proposed changes. This standstill period would give the FSA chance to exercise its veto before such changes were implemented. Otherwise, the government runs the risk that later down the line, after numerous appeals of judicial review, the FSA's remedy of rescission of the rules is considered disproportionate due to the time lag.
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