Securities and Exchange Commission officials are pressing Chinese companies with stock trading in the U.S. to make sure investors are aware of the potential risks they face because of limits on American regulators’ ability to review their books.
Lawyers in the SEC unit that reviews corporate filings released
The guidance doesn’t have the force of an SEC rule, but it may have an immediate impact as corporate lawyers look to avoid enforcement actions over improper risk disclosure. U.S. securities law requires all publicly traded companies to tell investors about any risks that are deemed “material.”
The move by the SEC’s Division of Corporation Finance follows recommendations issued in August by the President’s Working Group, a group that includes SEC Chairman Jay Clayton and other top U.S. financial regulators.
China and the U.S. have long been at odds over Beijing’s refusal to allow the Public Company Accounting Oversight Board to review the work done by auditors of Chinese firms. In addition to Monday’s announcement, the SEC is also pushing ahead on a plan that could lead to Chinese companies being kicked off U.S. stock exchanges over the same issue, Bloomberg News reported last week.
“China-based issuers must fully disclose material risks related to their operations in China,” the SEC lawyers said in the guidance document. “Investors in China-based issuers may not benefit from a regulatory environment that fosters effective enforcement of U.S. federal securities laws.”
According to the SEC, key questions that Chinese issuers should consider when disclosing risks include:
- The inability of PCAOB staff to inspect audits and difficulty that U.S. regulators have in accessing work papers;
- The limited ability of U.S. authorities to conduct investigations;
- The use of corporate structures that differ from those of U.S. firms and limit shareholder rights; and,
- The risks associated with China’s “less-developed legal system” and the country’s changing regulations.
