This week Hank Paulson, US Treasury secretary, described a “thicket” of regulation that is strangling US capital markets and diminishing their competitive position. Officials as diverse as Senator Charles Schumer and Dick Cheney, vice-president, have agreed that action is needed to restore US market competitiveness. Yet “pruning” Sarbanes-Oxley is not the only issue that can move the centre of global capital markets back over the tip of Manhattan.

The Securities and Exchange Commission faces an important decision that will be revealed on December 13 – one that will send a signal to global companies about the openness of US capital markets while also affecting the ability of US shareholders to hold an internationally diverse stock portfolio. The question is whether foreign companies listed on US markets can ever choose to withdraw their US listing.

Any company that seeks to sell its securities on a US market must also comply with its system of securities law and investor protections (such as Sarbanes-Oxley). The theory is: “If you want to play in our sandbox, you have to play by our rules.” Fair enough. But what if you do not like the sandbox and want to leave? Under current law, if you have more than 300 US investors (both individuals and institutions such as Fidelity) you cannot. This is known to some wags in Washington as “the Hotel California effect”. You can check out, but you can never leave.

Lacking redress from the SEC, companies are getting creative with strategies to remove themselves from US markets and regulatory cost. They are banning US investors. For instance, Cable & Wireless, a UK company, changed its charter to require that any stockholder in the US had to sell shares in the company if he or she owned fewer than 100,000 shares. The move was part of its effort to withdraw from New York Stock Exchange and US regulatory purview by getting under the 300 shareholder rule.

A further sign that US market competitiveness is eroding is that US companies are considering skipping New York and going directly to London. Prior to 2004 there were just five US companies listed on London’s Alternative Investment Market. Today there are 10 times that figure. This is troublesome for US investors, who own $2,400bn worth of foreign company shares – whether traded on a US or foreign exchange. International diversification has been an important part of the rise in the value of American portfolios. American investors want to invest in the companies they think have the best prospects for a lucrative return regardless of where the company is located. They certainly do not want to stay up half the night to trade the next Google in London.

Efforts are afoot to address this competitiveness issue. The SEC and the Public Company Accounting Oversight Board are about to embark (with the support of Congress and the administration) on an effort to restore sanity to Sarbanes-Oxley by fixing section 404 and the audit rules that have executives and their auditors arguing about keeping track of pencils instead of profit and loss statements.

But on the Hotel California effect, the SEC needs to take bold action. Last December it proposed a rule loosening the requirements for companies choosing to deregister that it now recognises would have applied to only a handful of companies. If companies are forced to stay in the US because they have some arbitrary level of US shareholders, the SEC is essentially sending a message that any company that has US shareholder investment technically has an obligation to be registered. That certainly does not conform with the SEC’s denials that it has ambitions for extraterritorial regulation in the context of possible exchange mergers.

A debate is now ensuing within the SEC about how far to go in allowing companies to deregister. Some fear that too many foreign companies may “check out” of US markets. That concern misses the point. To be competitive, you have to have the courage of your convictions. If the SEC believes US markets provide the highest standards of investor protection and transparency, massive liquidity and the most efficient markets, it should not issue final deregistration rules that apply only to some percentage of companies. The “check out” policy should apply to everyone on an equal basis.

If it chooses a policy that allows everyone potentially to leave, it will be pleasantly surprised by how many companies stay and how many new ones check in.

The writer is president and chief executive of the Organization for International Investment, an association of 150 US subsidiaries of foreign companies