On Dec. 2, the U.S. Securities and Exchange Commission (SEC) announced its final plan on implementing a new law that requires foreign companies to observe U.S. accounting rules and comply with information requests made by regulators. Any company failing to observe these rules can be delisted from American exchanges by the SEC.
The rules are related to the Holding Foreign Companies Accountable Act (HFCCA), a bipartisan bill that was signed into law by former President Donald Trump in December last year. Delisting would be carried out against companies that do not comply with the audit requirements of the Public Company Accounting Oversight Board’s (PCAOB) for three consecutive years.
The bill was pushed forward after Beijing constantly kept thwarting foreign regulators from accessing financial records of Chinese companies citing privacy and national security reasons.
“This final rule furthers the mandate that Congress laid out and gets to the heart of the SEC’s mission to protect investors. The Commission and the PCAOB will continue to work together to ensure that the auditors of foreign companies accessing U.S. capital markets play by our rules. We hope foreign governments will, working with the PCAOB, take action to make that possible,” SEC Chair Gensler said in a statement on Dec. 2. More than 50 foreign jurisdictions now allow PCAOB to carry out inspections. China and Hong Kong do not allow it.
The SEC will initially identify companies that are non-compliant with auditing requirements and will classify them as commission-identified issuers. The new rules mandate Commission-Identified Issuers to submit documentation to the SEC establishing the fact that neither they nor any of their shell companies are owned or controlled by a foreign government.
This can include documents showing that government entities do not have a controlling financial stake in the business as well as the names of individuals affiliated with the CCP who are members of the board, among other things.
The rules will be applicable to Chinese entities that list in the United States via a Variable Interest Entity (VIE) business structure. The SEC will start identifying Commission-Identified Issuers for fiscal years beginning after Dec. 18, 2020.
When the HFCCA was passed by the Senate last year, Democrat Brad Sherman, who initiated the legislation in the House, had said that the bill might be “the most significant piece of investor protection legislation” passed in recent years.
“It is designed to assure Financial Statement integrity of 224 U.S.-Limited companies with over $1.8 trillion in market capitalization. The purpose is not to de-list any company, but to persuade China to allow the audit oversight that U.S. investors need, and the U.S. investors get when investing in U.S. companies or companies in over 50 foreign jurisdictions,” Sherman said at the time.
The SEC announcement comes just as Chinese ride-hailing giant Didi announced that it was delisting from the New York Stock Exchange, moving instead to Hong Kong. Just five months earlier, Didi had launched a disastrous $4.4 billion IPO in the United States.
Shares of the company shortly collapsed after the listing as Beijing began a crackdown on the firm, accusing it of violating privacy laws. The crackdown was seen as the CCP’s attempt to rein in big tech firms. In an interview with CNN, Brock Silvers, chief investment officer at Kaiyuan Capital in Hong Kong, stated that Didi’s delisting from the NYSE might be the beginning of a trend. “Didi’s repatriation to [Hong Kong] is a significantly worrying indicator for the larger US-Sino economic relationship… Beijing essentially forced Didi’s hand,” Silvers said.