SEC finalizes rule to delist Chinese firms for not complying audit disclosure requirements

• The ruling requires Chinese firms to disclose if government entities have a controlling financial interest and the percentage of shares owned by a government

• It also requires the name of each member of the Chinese Communist Party who sits on the board

The U.S. government is edging towards booting foreign companies — mainly Chinese firms — off the American stock exchanges if they do not comply with Washington’s disclosure requirements. 

The Securities and Exchange Commission (SEC) on Thursday announced it is adopting amendments to finalize rules to implement the Holding Foreign Companies Accountable Act (HFCAA).

HFCAA mandates foreign companies to disclose their audit books to the Public Company Accounting Oversight Board or will be delisted from the New York Stock Exchange and Nasdaq if failed to report for three consecutive years.

It also requires companies to declare whether they are owned or controlled by any foreign government.

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“If you want to issue public securities in the U.S., the firms that audit your books have to be subject to inspection by the PCAOB,” SEC Chair Gary Gensler said in a statement. “While more than 50 jurisdictions have worked with the PCAOB to allow the required inspections, two historically have not: China and Hong Kong.”

After the announcement, the Nasdaq Golden Dragon China Index — which tracks 98 U.S. listed with most of their business in China — shed 1212 points or dropped more than 12% since Thursday.

Why the regulation

China’s repeated refusal to let PCAOB, which was formed in 2002, to oversee the audits of foreign firms such as Alibaba Group Holding Ltd and Baidu Inc that trade on American exchanges has vexed U.S. regulators for more than a decade.

The law was passed in December 2020, in a rare bipartisan move during the Trump administration, following the high-profile accounting scandal at Chinese firm Luckin Coffee Inc, leading the company to fire its CEO and COO.

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“This final rule furthers the mandate that Congress laid out and gets to the heart of the SEC’s mission to protect investors,” Gensler noted.

The latest development could lead to more than 200 non-compliant companies being kicked off U.S. exchanges. Much of the recent tension between the world’s two biggest economies has been around the shell companies that Chinese firms use to list in the U.S.

China’s stance

China has taken steps in a bid to end the standoff.

Last month Shen Bing, director-general of the Department of International Affairs at China Securities Regulatory Commission at a Securities and Futures Commission forum in Hong Kong, said getting delisted from U.S. exchanges would be a setback for the companies, global investors, and the China-U.S. relationship.

He said the China Securities Regulatory Commission is “working very hard” to resolve the audit oversight issues with its U.S. counterparts.

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In August, China’s top government body, State Council, issued guidelines saying it would boost cross-border accounting cooperation while safeguarding its information security.

It followed a statement from the nation’s security regulator, which said it would enhance conditions for collaboration with the U.S. on company audits during the second half of the year.

Picture Credit: CNBC