Regulation

SEC Finalizes Rules on Chinese Issuers

The commission will use the rules to apply a law that allows it to delist issuers for failing to open their books to the PCAOB.
Matthew HellerDecember 3, 2021

The U.S. Securities and Exchange Commission has finalized the rules it will use to implement a law that allows it to delist Chinese stocks.

Under the Holding Foreign Companies Accountable Act (HFCAA), the SEC can ban companies from trading and delist them from exchanges if the Public Company Accounting Oversight Board (PCAOB) is not able to audit requested reports for three consecutive years.

China currently does not allow the PCAOB to examine the audits of firms whose shares trade in America, citing national security concerns.

In a final rule released on Thursday, the SEC said any issuer that the PCAOB is unable to inspect must submit documentation to the commission certifying (if true) that it is not owned or controlled by a foreign government.

Such an issuer must also make additional disclosures in its annual report, including the percentage of its shares that are owned by a foreign government and the name of any board member who is an official of the Chinese Communist Party.

“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 Public Company Accounting Oversight Board,” SEC Chair Gary Gensler said in a news release, noting that China and Hong Kong are the only jurisdictions that have refused to work with the board to allow inspections.

“The finalized rules will allow investors to easily identify registrants whose auditing firms are located in a foreign jurisdiction that the PCAOB cannot completely inspect,” he added.

Congress passed the HFCAA last year amid tensions between the United States and China. In its rulemaking, the SEC has focused both on Chinese companies that register securities directly in the U.S. and those that use so-called variable interest entities, or VIEs, a form of shell company.

“It’s our job to protect American investors from fraudulent businesses seeking to take advantage of them,” said Sen. Chris Van Hollen, Maryland Democrat, a co-author of the HFCAA. “Requiring all publicly listed companies on our U.S. exchanges to be held to the same standards is the best way to do that.”