On July 30, 2002, Congress passed sweeping corporate reform legislation, popularly known as the Sarbanes-Oxley Act of 2002.l Reacting to the sudden collapse of Enron Corporation and its catastrophic results for U.S. investors, Congress hastily enacted this legislation to reign in corporate abuses and restore confidence in U.S. capital markets. To the dismay of the international business community, the Sarbanes-Oxley Act plainly applies to foreign corporations listed on a U.S. stock exchange. Moreover, despite the longstanding policy of the securities and Exchange Commission (sec) to exempt foreign corporations from U.S. securities regulations, some of the rules initially promulgated by the sec pursuant to the Sarbanes-Oxley Act subjected roughly 1300 foreign companies to the stringent new requirements of the law. section 301 of the Sarbanes-Oxley Act imposes new requirements for the composition of audit committees; section 302 creates strict account certification provisions; and section 402 imposes new rules for the provisions of loans.
These provisions of the Sarbanes-Oxley Act and subsequent sec regulations have spawned harsh criticism and angry protest from the international business community. In particular, the United Kingdom, Germany, and Japan are protesting Congress's lack of respect for principles of comity, which require the United States to defer to home-country regulation where those provisions are equivalent or superior to the Sarbanes-Oxley Act.a sections 301 and 302 of Sarbanes-Oxley and the corresponding sec regulations clash with the laws or practices of these foreign issuers' home jurisdictions.3 Moreover, section 402 discriminates against foreign banks that are not subject to the restrictions imposed by the Federal Reserve Board by failing to exempt these banks from the prohibition of loans by companies to directors and employees.4 Foreign officials and businesses are therefore justified in their objections to the extraterritorial imposition of U.S. corporate governance standards.
This Note discusses why it is improper for the sec to export U.S. standards in disregard of other nations' sovereignty. Part II summarizes the recent history of corporate scandals in the United States and the ensuing legislative response that resulted in passage of the Sarbanes-Oxley Act. Part III discusses international criticism of Sarbanes-Oxley, including an analysis of the argument that Congress ignored the presumption against extraterritoriality. This Part also outlines previous sec exemptions for foreign private issuers, as well as the serious conflicts between proposed sec regulations implementing the Sarbanes-Oxley Act and the corporate governance regimes of the United Kingdom, Germany, and Japan. Part III then contrasts the congressional approach taken in the Sarbanes-Oxley Act with prior international efforts to fight corruption, and the possible negative effects of applying the new U.S. corporate governance regime to foreign corporations. Finally, Part IV concludes that a preferable approach would be for the United States to cooperate with other countries and develop international standards for accounting and oversight of corporate behavior. This approach would complement international efforts to combat bribery and corrupt practices, respect the sovereignty of other nations, and move toward a harmonious global business community.
A. Corporate Corruption
In early 2001 Enron Corporation had assets totaling over $49 billion and was listed in Fortune as the seventh largest U.S. corporation.5 But on December 2, 2001, the Houston-based corporation filed for Chapter 11 in U.S. Bankruptcy Court.6 The corporation was forced to lay off thousands of employees, while its plunging stock wiped out the investments and retirement savings of families across the nation.7 In the investigation that followed the demise of Enron, Arthur Andersen, Enron's …