Chinese firms should face faster US stock delisting over audit rules, SEC chairman Gary Gensler tells lawmakers
- The top US securities regulator says he supports a bill in Congress that allows for faster removal from American markets for not complying with disclosure rules
- Lawmakers and the financial industry have pressed the SEC to force Chinese companies to improve disclosure standards
The chairman of the Securities and Exchange Commission on Tuesday urged Chinese firms to comply with American auditing rules and said the agency supported legislation that would allow for faster delisting.
Gary Gensler, testifying before the Senate Committee on Banking, Housing and Urban Affairs, said that the agency has “had discussions directly with the Chinese authorities” about the potential speeding up of delisting and that “the clock is ticking”.
The bill – the Accelerating Holding Foreign Companies Accountable Act – would reduce the amount of time US-traded Chinese companies have to hand over their audits to US regulators to two years from three years before they can be delisted from American exchanges.
The Senate passed the bill in June but the House of Representatives has yet to vote on it.
Senator John Kennedy, a Republican from Louisiana and one of the bill’s sponsors, said on Tuesday that they were “having a little trouble getting the House to take it up” and asked Gensler if he would ask members of the lower chamber to vote on the measure.
Gensler said he “has expressed his support for the legislation” and “has already had some discussions” with House leadership.
The SEC has come under pressure from lawmakers and the financial industry to force Chinese companies to improve disclosure standards. Last year, the Holding Foreign Companies Accountable Act was passed and became law, starting a three-year countdown for Chinese companies to comply with auditing rules.
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The SEC’s “realm is implementation”, said Andrew Bishop, head of policy research at Signum Global Advisors. Gensler “probably won’t spend much time actively pushing for the law’s passage”, but he adheres to the view “on a very consensual issue in the US”, Bishop said.
In a Wall Street Journal opinion article published on Monday, Gensler said: “Unless China’s companies abide by the rules, their shares won’t be able to trade in the US.”
In Tuesday’s testimony, Gensler continues to stress the importance of compliance. “Now it’s up to Beijing to let the oversight board in so we can ensure the relevant audits are up to US standards,” he said.
He said that by early next year he expected to announce the companies using an auditor that doesn’t open its books to US overseers.
“If these companies use an audit firm in a non-compliant jurisdiction for two more years consecutively, their shares will be prohibited from trading in our capital markets beginning in 2024,” he wrote, referring to the current three-year compliance deadline.
In prepared written testimony on Tuesday, Gensler said that China and Hong Kong were the only ones that refused to agree to abide by the 2002 Sarbanes-Oxley Act, which requires foreign companies wanting to issue public stock in the US to hand over audits to regulators.
His testimony came weeks after the SEC put a “pause” on Chinese share offerings in the US. The agency said companies would be required to disclose clearly the fact that shares would be sold through shell companies outside China, known as variable interest entities, or VIEs.
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The arrangement had helped companies bypass Beijing’s restrictions on overseas listings in certain sectors. But under that structure, US investors were buying securities from overseas entities that did not own the underlying assets of operating companies. In case of financial restructuring, investors in the US could have limited recourse to access their assets and be reimbursed.
In late July, the SEC required the listing firms to describe the shell company differently from the China-based operating company and make their financial connections clear to investors. The listing firms would also need to state the risks investors might face in the event of regulatory pressure from the Chinese government.
In addition, companies need to disclose whether Chinese authorities have approved or denied their applications to list on US exchanges, as well as the risks associated with potential denials.
