In prepping a class session on convergence, I found a March 2012 speech by Meredith Cross, the SEC’s Director of Corp Fin, that raised an interesting possibility.  A select group of foreign companies that cross-list their securities in the U.S. and prepare their financial statements using IFRS as issued by the IASB might have to once again prepare reconciliations between IFRS and U.S. GAAP.

As most of you know, prior to 2007, a foreign registrant’s 20-F included a reconciliation that started with reported income and owners’ equity (prepared using either home country GAAP or IFRS) and ended with as-if income and owners’ equity under U.S. GAAP. In 2007, that requirement was eliminated if the registrant used IFRS as issued by the IASB.   This was seen as a great win for the IASB and European companies.

So why might the SEC reconsider its 2007 action?  Ms. Cross states that the SEC has observed “a fundamental change in the demographics of our population of foreign private issuers.  At one time, not so long ago, the typical foreign private issuer was a large cap, FT Global 500 company that was listed in its home country and that was looking to list on the New York Stock Exchange as a secondary listing… By and large, the home country was the principal price discovery market, and the level of disclosure that supports price discovery and trading in the home market should also support price discovery and trading in the United States. The United States did not need to drive periodic disclosure for U.S.-listed foreign companies —the home country regulator was focused on that.”

Now, Ms. Cross finds that “a large percentage of [the approximately 1,000 foreign private issuers] are listed only in the United States. It has always been the case that there were some foreign companies that were only listed in the United States, but now we see large numbers of foreign companies whose only trading market is the New York Stock Exchange or Nasdaq.”  She then raises several questions, including “Should companies that are only listed in the United States, whose only price discovery market is an exchange in the United States, who have a significant shareholder base in the United States, and who have no applicable home country disclosure requirements, be subject to a reporting model that is different than a U.S. company? Should these companies not be required to provide quarterly financial information and 8-K level current reporting?”

To me, this suggests the SEC is contemplating a change in the reconciliation exclusion that it passed back in 2007.  Simply using IFRS is not enough.  Additional requirements such as being listed on a non-US exchange and being subject to the securities regulations associated with that exchange appear to be in the works.

I was unaware of the large uptick in foreign companies registered only in the U.S.  Are any researchers looking at this new trend?  What are the characteristics of these companies?  How is price discovery affected by the limited disclosures under the 2007 exemption?  Precisely what information is available on these companies?  If you have a paper in the area or know of anyone doing work in the area, please post a comment.