If U.S. regulators don’t comply with auditor requests to obtain information, foreign public companies may be delisted. 

Today, the Securities and Exchange Commission passed amendments that finalize the Rules to Implement the Holding Foreign Companies AccountableAct (HFCAA). This law was approved in 2020, after Chinese regulators refused repeated requests from the Public Company Accounting Oversight Board(PCAOB) for inspections of audits by Chinese companies listed and trading in the United States.

Chinese companies will grow in 2020 Luckin Coffee fired its CEO and chief operating officerAfter an internal investigation of fraud, more people called for immediate action.   

This law gives the SEC the power to prohibit companies from trading or delist exchanges from those that are unable to provide audit requests for at least three consecutive years. The law also mandates companies to disclose whether any foreign governments are their owners or controllers.

These rules provide a foundation for law implementation.  

We have a fundamental bargain in our securities system, which was approved by Congress under the Sarbanes-Oxley Act 2002 on a bipartisan basis. In a statement, Gary Gensler, SEC Chair, stated that public securities can only be issued in the United States if the audit firms of your books are subject to inspection by The PCAOB.

Gensler pointed out that, while over 50 countries have cooperated with the PCAOB in allowing inspections to be conducted, only two have historically done so: China and Hong Kong.

Gensler stated that “This last rule advances the mandate Congress set out and goes to the heart the SEC’s mission to protect investor’s,” Gensler added.

Investors can now identify foreign companies not listed in America that do not allow the PCAOB access to their audits. 

Brendan Ahern is chief investment officer at KraneShares. He runs several China-focused ETFs including the “This is a difficult situation because the companies are held hostage.” KraneShares China Internet ETFI was told by him. 

Ahern stated that it was the Chinese regulators who prevent the U.S. regulatory agencies from inspecting audits. The issue has unfortunately been made political. All these companies have been audited by Big Four accounting firms. However, Chinese law regulators prohibit the PCAOB from receiving audits of such businesses.

“What you have are Chinese laws clashing with U.S. Law,” he stated. This should be addressed at the highest level of regulation, possibly the level of the trade representative.

Ahern stated that “the losers” are U.S. investors who own these stocks.

He pointed out that many Chinese businesses that have been listed in the U.S. already relist in Hong Kong.