Remarks Of Isaac C. Hunt, Jr. Commissioner* U.S. Securities and Exchange Commission Washington, D.C. Bank of New York/CTEC Program "Securities In The U.S. and Russian Stock Markets" New York, New York May 19, 1997 _____________ *The views expressed herein are those of Commissioner Hunt and do not necessarily represent those of the Commission, other Commissioners or the staff. I am delighted to join you to this conference on "Securities in the U.S. and Russian Stock Markets." It was almost a year ago to the day that I had the pleasure of participating in a conference in Moscow on Russian companies raising capital in the American markets, which my agency -- the SEC -- co-sponsored with the Russian Federal Commission on the Securities Market. Much has changed since that visit to Moscow. Vimpel Com, a Russian communications company, became the first Russian issuer to list shares on the New York Stock Exchange ("NYSE"). I just left a meeting with the Chairman of the NYSE before coming here this morning, and I understand that the NYSE anticipates having at least four more listings by Russian issuers during 1997. Additionally, Level I ADR facilities have now been established for around a dozen Russian issuers. Those facilities permit shares to be traded in the U.S. on non-exchange, non-Nasdaq markets, and this often is a first step towards listing stock on a U.S. exchange. Russian issuers are not alone in showing interest in participating in the U.S. public markets. There are now well over 900 foreign companies from 48 countries filing reports with the SEC. Since the beginning of 1996, 60 new foreign issuers were listed on the NYSE, and foreign issuers now account for more than 10% of NYSE-listed companies. In addition, well over 300 non-U.S. companies are traded on Nasdaq National Market System and Nasdaq Small Cap, and 60 non-U.S. companies are listed on the American Stock Exchange. As part of the SEC's efforts to facilitate foreign offerings and listings in the U.S., we believe that it is important to look beyond our own regulations and to encourage improved regulation in home country markets. Improved home country regulation should lead to an increase in the number of foreign issuers who can access international markets, and also should strengthen the foreign investment climate abroad for U.S. investors. The SEC is strongly committed to assisting the Russian Commission ("Commission") in its efforts to strengthen Russia's markets. Since the creation of the current Commission, we have been providing it with technical assistance. The ties between our two agencies were furthered in late 1995 by the signing of a Memorandum of Understanding and a Protocol that provide for regulatory and enforcement cooperation. Our most recent effort to support the development of the Russian markets was the creation of the U.S.-Russia Capital Markets Forum under the auspices of the Gore-Chernomyrdin Commission. I had the pleasure of signing the documents establishing the Forum during a meeting in Moscow in July 1996. The Forum chairs include U.S. Treasury Secretary Rubin, SEC Chairman Levitt, and Commission Chairman Vasiliev. Earlier this year, the Forum invited U.S. and Russian private sector experts to recommend ways to build the Russian capital markets. The challenges that Chairman Vasiliev and his colleagues at the Commission have faced in forming Russian capital markets may be unprecedented. Their accomplishments are equally impressive, and I'll mention just four: 1. the successful introduction of the Russian Trading System, an electronic over-the-counter market including some of the best features of the Nasdaq Stock Market model; 2. the enactment of a law on Joint Stock Companies that provides a modern governance framework; 3. the passage of a law on the Securities Market that empowers the Commission to license market participants and oversee the development of fair and orderly markets; and 4. the introduction of a new, regulated class of investment funds designed so that individual Russian investors may participate in their market with confidence. Those are impressive accomplishments. But there also are a number of areas where additional work is necessary. Three areas seem especially important: 1. There needs to be an improved framework for disclosure and financial reporting by Russian issuers. This is essential to foster improved corporate governance and protection of shareholder rights. 2. Both the Commission and individual investors should be given greater legal authority to obtain redress for violations of securities and corporate laws. 3. The Russian clearance and settlement system must be improved. I saw in a recent publication from Investors Bank & Trust Company, for example, that the settlement cycle for equities can vary anywhere from T+5 in Moscow to T+30 if outside of Moscow, with an average duration of T+7. An improved Russian clearance and settlement system clearly would reduce transaction costs and broaden investor participation in the Russian equity markets. Returning to my initial theme regarding accessing U.S. capital markets, during this conference you will learn about many important developments affecting the ability of foreign private issuers to access U.S. markets. Briefly, I'll highlight three of them. They are: 1. preemption of state securities laws under the National Securities Markets Improvement Act of 1996; 2. recent changes in the NASD's rules that will eliminate secondary trading of Level I ADRs on the NASD's OTC Bulletin Board Service; and 3. the SEC's ongoing efforts to provide financial reporting relief for foreign private issuers. Preemption. Some foreign private issuers cited the burdens of compliance with the different securities laws of the 50 U.S. states as an obstacle to making a public offering in the U.S. market. Congress addressed this problem in the National Securities Markets Improvement Act of 1996. Congress amended the federal securities laws to preempt state registration or qualification of securities or securities transactions where the security involved is a so-called "covered security." Covered securities include any security that is listed or authorized for listing on the NYSE or the American Stock Exchange, or listed on the National Market System of the Nasdaq Stock Market. Investor protection was not sacrificed, however, since the states retain jurisdiction to bring enforcement actions for securities fraud or unlawful conduct by broker-dealers with respect to covered securities. Changes in NASD OTC Bulletin Board Rules. Earlier this year, the SEC approved certain rule changes relating to the NASD's OTC Bulletin Board Service. One change significantly affects foreign private issuers with Level I ADRs traded on this marketplace. As most of you know, an issuer whose securities are represented by Level I ADRs has not registered the underlying securities under Section 12 of the Securities Exchange Act of 1934 and, therefore, has not become an SEC reporting company. Accordingly, Level I ADRs are not permitted to trade on a U.S. stock exchange or the Nasdaq Stock Market. An issuer also is not permitted to use Level I ADRs to raise capital through a public offering in the U.S. market. Despite these limitations, many foreign private issuers participate in a sponsored Level I facility because it is an easy, low-cost way to make an entry into the U.S. public markets. The principal advantage of a Level I ADR program for a foreign issuer is that the disclosure documents filed with the SEC do not require that the issuer's financial statements be presented either on the basis of U.S. generally accepted accounting principles ("U.S. GAAP"), or reconciled with U.S. GAAP. Under recent rule changes approved by the SEC, Level 1 ADRs may no longer trade on the OTC Bulletin Board. This is because, after April 1, 1998, foreign issuers wishing to trade their ADRs on the Bulletin Board must have registered the class of securities underlying the ADRs pursuant to Section 12 of the Exchange Act. Section 12 registration essentially will require such issuers to elevate to Level II ADR status, including SEC reporting in accordance with U.S. GAAP, or reconciled to U.S. GAAP. The SEC made this change because it felt that the transparency benefits of inclusion of unregistered foreign securities on a visible U.S. market may be outweighed by the fact that U.S. style disclosure and reporting information would not be available with respect to these foreign issuers. Moreover, a 1-year sunset provision for unregistered foreign issuers on the Bulletin Board will give these issuers an opportunity to consider whether to register and become reporting issuers under the Exchange Act, or to make other arrangements. Financial reporting relief for foreign private issuers. In recent years, the SEC has adopted several initiatives designed to ease financial reporting burdens for foreign private issuers and to eliminate unnecessary requirements. Among the more significant changes are: 1. streamlining U.S. GAAP reconciliation requirements by acceptance of International Accounting Standards relating to cash flow statements, business combinations and operations in hyper-inflationary economies; 2. transition reconciliation requirements that permit first- time foreign issuers to reconcile the required financial statements and selected financial data for only the two most recently completed fiscal years and any interim periods (by comparison, domestic issuers are required to file three years of audited financial statements and five years of selected financial data); 3. allowing financial statements to be updated principally on a semi-annual basis, rather than quarterly as required for U.S. firms; 4. accounting accommodations for foreign companies using pro rata consolidation to account for a joint venture investment; 5. elimination of the requirement that foreign issuers provide certain financial statement schedules; 6. acceptance of financial statements stated in any currency that a foreign issuer deems appropriate; and 7. further relaxation of the "significance" tests for separate presentation and reconciliation of the financial statements of businesses acquired or proposed to be acquired. Additionally, lawyers and accountants within the SEC's Division of Corporation Finance are available to discuss specific disclosure and reporting problems with foreign private issuers. SEC staff generally will review foreign issuer's disclosure documents on an expedited basis and in draft form, and will undertake a preliminary review on a confidential basis. This helps to facilitate cross-border offerings and listings in light of potentially conflicting home-country schedules and disclosure requirements. International Accounting Standards. The SEC is working with its colleagues in the International Organization of Securities Commissions to provide input to the International Accounting Standards Committee's development of a comprehensive set of international accounting standards. Because accountability and full disclosure are the hallmarks of the U.S. marketplace, the SEC has indicated that for international accounting standards to gain SEC acceptance, three things must be in place: 1. The standards must include a core set of accounting pronouncements that constitutes a comprehensive, generally accepted basis of accounting. 2. The standards must be of high quality. They must result in comparability and transparency, and provide for full disclosure. 3. The standards must be rigorously interpreted and applied. In conclusion, I believe that the initiatives I summarized demonstrate that access of foreign private issuers to U.S. markets is a high priority issue at the SEC. The substantial number of foreign private issuers who have successfully accessed U.S. markets also demonstrates that the process is not as burdensome as some would suggest. I encourage you to work with our staff, be candid about your problems, and we will do our best to assist you. Thank you.