How a vague SEC proposal could boost listings on European stock exchanges

A little-known regulatory proposal taking shape in the United States could provide a welcome boost to European stock exchanges, which have struggled for years to stem the exodus of companies to New York.

The Securities and Exchange Commission (SEC) is in the early stages of a proposal to tighten rules for foreign companies trading on US exchanges, a move that could inadvertently prompt dozens of stocks to seek secondary listings in London or another major financial center.

The plan targets the definition of a “Foreign Private Issuer” – a status that allows companies outside the US – such as chip company Arm and media company Spotify – to avoid some of the SEC’s most stringent regulatory requirements, such as exemptions from quarterly reporting.

The potential change comes as European exchanges struggle with several well-known companies increasingly choosing to list in the U.S., attracted by higher valuations and greater liquidity.

The regulatory loophole

The SEC’s proposal stems from what it sees as a growing regulatory loophole.

When the FPI framework was created, it was built on the assumption that foreign companies registered in the US were already subject to “meaningful disclosure and other regulatory requirements in their home jurisdictions.”

But that has changed dramatically over the past two decades, according to the SEC’s concept note outlining the proposal.

“From the SEC’s perspective, this universe of foreign private issuers is subject to a lighter regime in the U.S., but they are not subject to significant oversight in their own jurisdiction,” said Mike Binnenfeld, a U.S. attorney specializing in SEC compliance at law firm Linklaters.

What if the proposal becomes a rule?

However, if the SEC proceeds with the foreign listing requirement, affected companies will face a choice between relisting abroad or being subjected to the stricter supervisory regime applicable to domestic companies in the US.

This includes filing detailed quarterly reports, rather than providing updates only twice a year. Companies will have to convert their accounting from International Financial Reporting Standards (IFRS) to US Generally Accepted Accounting Principles (US GAAP), a significant undertaking, according to Linklaters’ Binnenfeld.

If the SEC goes ahead, it would boost competition among the world’s stock exchanges. The London Stock Exchange, with its deep historical ties to capital markets and a regulatory framework that the SEC knows well, could be a significant beneficiary.

“I think to the extent that the SEC decides to really enforce the original intent of this rule, it could require companies to list elsewhere,” said David Schwimmer, chief executive of the London Stock Exchange.

“London would be the natural place for it.”

He wouldn’t be the only contender, though.

Exchanges in the Euronext network, which includes Paris, Amsterdam and Dublin—as well as those in Canada and Hong Kong—could compete for these secondary listings. Nasdaq
operates several exchanges in the Nordic countries, which could also compete.

Ultimately, the decision for companies will depend on factors such as price, access to deep capital funds, efficiency of the listing process and access to quality analysts.

“It’s certainly something we talk about with potential IPOs,” Schwimmer added.