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SEC to Demand All China Firms Say More About Investor Risks

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·4 min read
SEC to Demand All China Firms Say More About Investor Risks
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(Bloomberg) -- The Securities and Exchange Commission will demand that the more than 250 Chinese companies trading in U.S. markets better inform investors about political and regulatory risks, expanding a dictate that it recently imposed for firms seeking initial public offerings.

SEC Chair Gary Gensler said in a Tuesday interview that he envisions the enhanced disclosures being included in corporations’ annual reports beginning early next year. The new details would likely include information about the businesses’ shell-company structures, he added.

Investors need “full and fair disclosure,” Gensler said. “Are the disclosures really fit for the times about the regulatory risks, the various political risks?”

The heightened requirement marks the SEC’s latest response to Beijing’s clampdown on private industry. The moves, including enhanced security reviews of companies pursuing foreign listings, have shocked Wall Street and triggered a deep selloff of many Chinese stocks trading in the U.S.

Read More: Why China and U.S. Are Clashing Over Stock Listings

Last month, the SEC announced it would halt new IPOs from Chinese companies until they bolster disclosures. The decision followed an onslaught of fury on Capitol Hill that was triggered by Didi Global Inc.’s New York listing in July.

Didi Fiasco

Right after Didi sold stock, China surprised investors by announcing it was scrutinizing the ride-sharing company and would restrict it from adding new customers. Didi shares tanked, prompting U.S. lawmakers to demand that the SEC investigate whether the company knew what steps China was considering and failed to disclose those risks to investors.

Gensler declined to discuss Didi.

Among the companies with U.S. listings that might have to reveal more about Beijing pressures are some of China’s biggest, including Alibaba Group Holding Ltd. and Baidu Inc.

Gensler declined to say what consequences businesses would face for not complying with his plan, but he noted that the SEC has a range of powers at its disposal. He also wouldn’t comment on how long the agency’s current pause on new IPOs from China would last.

“It’s really up to the issuers,” Gensler said.

Rising Tensions

The SEC chief’s plans are almost certain to add to tensions between the U.S. and China. Flashpoints in the geopolitical standoff have included trade policy and Beijing’s clampdown on Hong Kong. How the friction plays out could have big implications for Wall Street, as China this year is opening its financial markets more fully to industry giants such as Goldman Sachs Group Inc.

The SEC is already signaling areas where it wants more robust disclosure, telling Chinese companies privately to better explain their corporate structures. Many firms list in the U.S. through so-called variable interest entities, or VIEs. In such an arrangement, American investors are actually buying shares in shell companies -- often based in the Cayman Islands.

Gensler also addressed his agency’s protracted dispute with Chinese regulators over access to corporations’ financial audits. U.S. law requires that any firm trading in New York allow Washington-based inspectors to review its audits -- a compliance demand that China has long snubbed citing national security concerns.

Read More: Why U.S. Threatens to Delist China Stars Like Alibaba

In a rare bipartisan move during the Trump administration, Congress in December mandated that Chinese companies open their books to U.S. scrutiny or risk being kicked off the New York Stock Exchange and Nasdaq within three years.

Chinese Cooperation

Implementing the new requirement was left to the SEC, and Gensler said Tuesday that firms could be de-listed as soon as 2024 if they fail to comply. There are now 281 Chinese companies trading in the U.S. More than 100 firms based in Hong Kong, where American inspectors are also denied full access to financial audits, trade on American exchanges as well.

China’s top government body issued guidelines Monday pledging to boost cross-border cooperation with U.S. regulators on accounting issues. The announcement followed a statement from China’s security regulator in which it said it would work to enhance conditions for cooperation on company audits during the second half of the year.

(Updates with background on audit rules, starting in 13th paragraph.)

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