WRITTEN QUESTION E-3159/02

by Erik Meijer (GUE/NGL) to the Commission

(5 November 2002)

Subject: Application of the most effective methods of combating corporate fraud to companies operating or listed inside and outside the EU

1. On what grounds did Commissioner Bolkestein object on behalf of the Commission to the application of the US Sarbanes-Oxley Act to European companies with a second listing on the New York Stock Exchange or with subsidiaries operating in the USA? The Act in question requires businesses in the USA to make it impossible to provide misleading financial data by imposing obligations on their senior managers and subjecting them to independent supervision arrangements.

2. Do the objections referred to in paragraph 1 mainly relate firstly to the requirement to set up an independent board to oversee the supervisor and secondly to the ban on businesses extending loans to their own directors? What is wrong with these requirements?

3. Why should it be regarded as a form of extraterritorial rights to require businesses operating outside the EU to comply with the rules for the prevention of corporate fraud which apply in the country where they are operating or are listed on the stock exchange? Would it not be far truer to say that such rights were enjoyed if businesses operating within a country's territory were not subject to that country's domestic rules?

4. In the interests of establishing a comprehensive system of measures against corporate fraud, will the Commission seek an agreement with the USA based on the principle that the most effective supervision rules should apply to each party's businesses when they operate internationally, without themselves negotiating exceptions or allowing others to make exceptions, so that US companies which are listed on European stock exchanges and/or have branches or subsidiaries in the EU Member States are also subject to the rules which currently apply in the EU or are introduced by the EU in future?

Source: Dutch newspaper De Volkskrant, 9 October 2002.

Answer given by Mr Bolkestein on behalf of the Commission

(19 December 2002)

1. In its exchange of letters with the Chairman of the US Securities and Exchange Commission (SEC), Mr Pitt, and with US Congressmen Sarbanes and Oxley, the Commission has consistently indicated its full support for the objectives of the Sarbanes Oxley Act, which are to ensure proper financial reporting and hence to restore investor confidence in the capital markets. However, the Sarbanes Oxley Act, which was adopted without any prior consultation, includes several provisions that are disproportionate and burdensome for EU companies and audit firms because they are already subject to equivalent Community and national rules. In some cases, there are even clear conflicts of laws.

2. The European Commission has identified seven key issues of concern, such as the registration of Community audit firms at the Public Company Accounting Oversight Board (PCAOB), US access to EU audit working papers, audit committee requirements, auditor independence, loans to directors and executive officers, certification of financial reports and certification of internal control systems. These issues were discussed with Mr Pitt when the Commissioner in charge of the Internal Market and the Taxation and Customs Union met him in early October 2002 and were followed up in the framework of the EU-US regulatory dialogue mechanism.

A PCAOB registration of EU audit firms performing audits of EU companies with a dual listing in the US would imply double oversight (Member State + US) for all major EU audit firms. This is unnecessary, burdensome and inefficient and may even result in conflicts between two oversight mechanisms. As a consequence of the registration requirements, EU audit firms would have to apply US standards on ethics, auditing, quality assurance and auditor independence also for certain audits performed in the EU. EU audit firms would (also in the EU) be subject to inspections by the PCAOB which would duplicate the Member State's quality assurance system.

As to loans to directors and executive officers, the Sarbanes-Oxley Act expressly exempts executive officers of US banks from the prohibition. In contrast, the exemption does not apply to US-listed EU bank issuers, even if they are subject to comprehensive consolidated supervision by their Member States' regulators. The SEC has recognised this as discriminatory; the Commission has requested this discrimination to be eliminated.

3. While the US authorities rightfully expect the same standards of conduct from companies raising capital on American markets irrespective of whether they are domiciled in the United States or overseas, they are not necessarily better placed than other relevant authorities to establish precise rules that ought to apply outside the US jurisdiction. Unless exemption is granted, many EU companies and audit firms will be subject to super equivalent rules; leading at best to duplication and at worst to conflict of rules, confusion, double jeopardy and certainly unnecessary cost.

4. The Commission believes that the Sarbanes Oxley Act provides an excellent opportunity to pursue the EU-US regulatory dialogue aimed at resolving regulatory issues in a positive and constructive way. As the Community is rapidly integrating its capital market and financial services legislation and regulation such an EU-US dialogue will become increasingly important. The Commission will be pursuing all the areas of concern over the next months with the SEC as the implementing rules emerge.