Foreign public companies listed in the United States can be removed from the stock exchange if their auditors fail to comply with requests for information from US regulators.
On Thursday, the Securities and Exchange Commission passed changes to finalize the rules implementing the Holding Foreign Companies Accountable Act (HFCAA). The law was passed in 2020 after Chinese regulators repeatedly asked the Public Company Accounting Oversight Board (PCAOB), established in 2002 to oversee the audits of public companies, to review the audits of Chinese companies listed and trading in the United States. had refused states.
In 2020, Chinese company Luckin Coffee fired its CEO and Chief Operating Officer after an internal fraud investigation that increased calls to action.
The law allows the SEC to prohibit companies from trading and delisting from exchanges if the PCAOB is unable to review requested reports for three consecutive years. In addition, companies must disclose whether they are owned or controlled by a foreign government.
The rules passed on Thursday provide a framework for implementing the law.
“We have a fundamental agreement in our securities system that came out of Congress on a bipartisan basis under the Sarbanes-Oxley Act of 2002 for inspection by the PCAOB,” SEC chairman Gary Gensler said in a statement.
Gensler noted that while more than 50 foreign jurisdictions have worked with the PCAOB to facilitate inspections, “two historically not: China and Hong Kong”.
“This final rule supports the mandate established by Congress and gets to the heart of the SEC’s mission to protect investors,” noted Gensler.
The final rules will allow investors to identify foreign companies that are listed in the US and that do not allow the PCAOB to see their audits.
“This is a difficult situation because companies are being held hostage,” said Brendan Ahern, chief investment officer of KraneShares, which operates several China-focused ETFs, including the KraneShares China Internet ETF.
“It is the Chinese regulators who prevent the US regulators from reviewing the tests,” said Ahern. “Unfortunately, the topic has been politicized. These companies are all audited by the Big Four accounting firms, but under Chinese law, regulators do not allow these audits to be sent to the PCAOB. “
“What you have is Chinese law clashes with US law,” he said. “This needs to be dealt with beyond the regulatory level, perhaps at the agent level.”
“The losers are investors in these stocks who are US investors,” added Ahern.
He noted that some Chinese companies listed in the US are already listed again in Hong Kong.