SEC Chief Doubts Imminent Deal to Avoid China Delistings

SEC Chief Casts Doubt on Imminent Deal to Avoid China Delistings

Securities and Exchange Commission Chair Gary Gensler tamped down speculation that a deal is brewing to keep about 200 Chinese stocks from losing their listings, signaling that only total compliance with U.S. audit inspections will allow the companies to keep trading on American markets.

“There have been thoughtful, respectful, productive conversations, but I don’t know where this is going to end up,” Gensler said in a Tuesday interview, referring to ongoing negotiations. “It’s up to the Chinese authorities, and it could be frankly a hard set of choices for them.”

The SEC chief’s tough words show the U.S. remains unwavering in its demand that American regulators get full access to the audits. Gensler also underscored that U.S. law gives him little room for compromise -- and a congressionally imposed deadline of 2024 for kicking businesses off the New York Stock Exchange and Nasdaq Stock Market unless China acquiesces is looming. 

“If we’re in the same place two years from now,” many companies “would be suspended,” he said.

SEC Chief Doubts Imminent Deal to Avoid China Delistings

Gensler’s comments follow recent statements from the Chinese government that it has made overtures to allow some U.S. audit reviews. The U.S. and China have been at odds for two decades over the legal requirement, which is meant to protect investors from accounting frauds and other financial malfeasance. The issue escalated at the end of the Trump administration when lawmakers passed legislation that would delist foreign firms that refuse to comply.

China’s securities regulator said in a statement Thursday that talks with the U.S. Public Company Accounting Oversight Board will continue.

The SEC earlier this month started publishing a “provisional list” of companies that could face removal. While the move had long been telegraphed, it fueled a sharp decline in U.S. shares of companies based in China and Hong Kong. 

The latest update to the list came Wednesday, when the SEC flagged Baidu Inc., Futu Holdings Limited, Nocera Inc., iQIYI Inc. and CASI Pharmaceuticals Inc. as additional firms at risk. 

Futu’s inclusion doesn’t mean the company’s American depositary receipts will be forced to delist in the near-term, the company said in a statement Thursday. Futu has been assessing the potential impact of the U.S. legislation, and is actively exploring plans to maintain its listing status, the company said.

Dozens of other countries permit the U.S. audit inspections, giving American officials the go ahead to interview local accountants and scrutinize the documentation underlying their work. China and Hong Kong have refused, citing confidentiality laws and national security concerns.

Gensler, however, argued that so-called audit work papers rarely contain sensitive information. 

“That’s likely why 50 other jurisdictions have gotten comfortable with this over the years,” he said. “Work papers are things that confirm revenues and expenses.”

China’s government said this month that progress was being made in talks with U.S. regulators. 

One potential compromise being discussed by the China Securities Regulatory Commission would allow U.S. reviewers from the Public Company Accounting Oversight Board to inspect audit papers for some companies as soon as this year, Bloomberg News reported earlier this month. However, under the plan the CSRC would still seek to retain some ability to withhold sensitive data.

Though he didn’t comment on any specific proposals, Gensler indicated that such an option was unworkable under the terms laid out in the 2020 law, called the Holding Foreign Companies Accountable Act.

SEC Chief Doubts Imminent Deal to Avoid China Delistings

American inspectors, Gensler said, must be able to go into a foreign accounting firm and choose whichever audits of U.S.-traded corporations that they want to see. In addition, he pointed out that the American law focuses on noncompliant countries rather than specific companies. So if one request is blocked, it means the requirement isn’t being satisfied. Of course, if China wanted to shield a business’s financial documents, it could simply move the listing to a non-U.S. exchange. 

Since joining the SEC last year, Gensler has taken a hard line on the audit requirement and pushed for more protections for investors in Chinese stocks. He also suspended new Chinese initial public offerings until companies provide better disclosure about their potential pitfalls.

The PCAOB’s inspectors haven’t been able to review the audits of about 200 corporations based in China or Hong Kong, including Alibaba Group Holding Ltd. and Baidu. 

One wild card in the negotiations is that both the U.S. House and Senate have passed separate provisions calling for the delisting process be sped up. If those measures become law, Chinese audit firms would have less than a year to comply.

For his part, Gensler noted that the U.S. and Chinese governments have been at loggerheads over the audit-inspection requirement ever since it was imposed in 2002. 

“It’s been 20 years, so it’s a hard issue,” he said. “Sometimes when the clock is ticking, it focuses one’s mind.”

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