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Regulations Costly for Local Foreign Investment

There are more than 700 Japanese-based companies with offices located in Southern California, one of the highest concentrations of Japanese companies located outside of Japan. Hosting these companies in Southern California helps strengthen our local economy. Japan is the second largest source of foreign direct investments to the United States. More than 88 percent of the Japanese-based companies establish new facilities and hire local United States employees, rather than acquiring existing established U.S. businesses.

San Diego is a microcosm of this larger relationship. Major Japanese companies such as Takeda Pharmaceuticals, Kyocera, and Murata employ more than 6,000 people in San Diego County. It is one of our largest sources of foreign employment.

Tougher U.S. regulations in the securities markets, however, have hindered the growth of these enterprises, both locally and abroad.

One example is the Sarbanes-Oxley Act of 2002 (SOX), legislation enacted as a result of a number of highly publicized corporate frauds at Tyco, WorldCom and Enron, which exposed significant problems with internal controls and management. As a result of SOX, management must now individually certify and acknowledge the accuracy of financial information listed on registration statements. In addition, audit committees reviewing the financial statements must be independent of the company. Penalties for noncompliance or findings of fraudulent financial activity are now much more severe for both the board of directors as well as the audit committees reviewing the financial information.

Benefits vs. Costs

Debate continues over any actual perceived benefits against the exorbitant costs in complying with SOX. Japanese issuers are finding compliance not only expensive but difficult and in some cases impossible. There is a lack of appropriate audit committees in Japan,and even when a committee does exist, it is often not independent of management. The internal audit committees in Japan most often lack the sufficient experience and knowledge in assessing internal controls over financial reporting. The Japanese-based companies often also operate in multiple geographical locations, adding to the complexity of assessing internal controls over all locations.

Two Japanese corporations — Daiwa Securities Group and Fujifilm Holdings Corp. — have decided not to list on the New York Stock Exchange and are emblematic of the issues arising from SOX. These companies have explained that confusion in regards to the actual requirements of SOX are why they have not listed on the NYSE. Panasonic in 2013removed its listing on NYSE due to the considerable expense in reporting requirements, an expense that was not economically justifiable. There still are just over a dozen Japanese companies listed on the NYSE.

Since the passage of SOX the U.S. economy has seen a dramatic foreign issuers,transitioning their business to the London and Tokyo markets. Displacement of foreign issuers has not only stunted the growth of various Japanese companies located in San Diego but has caused many U.S. investors interested in portfolio diversification to invest abroad.

Jumpstart our Business Startups Act (“JOBS Act”) was enacted in 2012 to ease the negative implications of SOX. The JOBS Act is designed to facilitate capital formation by cutting back on a number of regulatory requirements and making the IPO process less burdensome for Emerging Growth Companies. There is still one small problem. Once the issuer exceeds $1 billion in total annual gross revenues, they are no longer eligible for the exemption. These companies are forced either to go public and comply with the expensive and rigorous requirements of SOX or delist from the U.S. markets. Even though the JOBS Act has helped revitalize the U.S. economy, there is no long-term benefit, and once again the U.S. will start to see a decline in foreign issuers.

We no longer live in self-contained, national markets. It is crucial for the U.S. to see this and begin to establish agreements to accept local regulatory requirements and not require foreign issuers to comply with SOX. Through the development of mutual recognition agreements,the U.S. should permit foreign issuers to register on U.S. markets as long as they comply with applicable local regulations. Our globalized economy moves together. And if the international markets begin to flourish, the U.S. and San Diego markets will surely flourish.

Taiba Munir is a third-year student at California Western School of Law in San Diego.

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