International Implications of Sarbanes-Oxley: Raising the Rent on US Law

Larry E Ribstein

Corman Professor, University of Illinois College of Law

jcls Vol 3 Issue 2 (October 2003)

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Abstract

The spectacular crashes and frauds of Enron and other US companies triggered a legislative response in the US in the form of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). This Act is likely to have unintended effects not only in the US, but also in international securities markets in which the US is a dominant player. Sarbanes-Oxley reflects a potential shift in the philosophy underlying the US securities laws from disclosure to substantive regulation of corporate governance. This shift could deter foreign firms from listing in the US, or otherwise becoming subject to US law. This is significant because some foreign firms in effect “rent” US law in order to overcome deficiencies in their home country law. By raising this rent, Sarbanes-Oxley may reduce the demand for US law, blocking non-US firms from moving toward more efficient governance, and impeding the internationalization of securities markets and laws. Alternatively, the SEC and perhaps Congress may forestall such flight by subjecting foreign-based firms to a lower level of regulation. This may encourage the development of country-based choice of governance rules, and therefore a kind of jurisdictional choice regime. The adoption of separate regulatory regimes for foreign and US issuers may, in turn, cause US regulators to reduce regulation of US as well as of foreign firms. Thus, international effects ultimately may constrain US regulation, most likely by curtailing the move from disclosure to substantive regulation of governance.

Keywords

Securities regulation, jurisdictional competition, international securities regulation, cross-listing, Sarbanes-Oxley, corporate governance, law and finance