Lawmakers during an October 26, 2021, House Financial Services subcommittee hearing mulled over the ramifications of delisting U.S.-traded Chinese companies under the Holding Foreign Companies Accountable Act (HFCA).
The hearing by the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets was marked by points of bipartisan agreement on the risks posed to U.S. investors by Chinese companies and the need to level the regulatory playing field. The hearing comes amid escalating tensions with China, underscored by claims by Rep. Brad Sherman, the panel’s chair, that potential witnesses pulled out due to pressure from China.
“We have great witnesses here today,” the California Democrat said. “But the most articulate witnesses are those who are not here today. Their decision to pull out of this hearing due to pressure, economic pressure, speaks loudly to China’s strong economic power over politics and economics here in the United States.”
Asked to clarify his comments by the panel’s ranking Republican, Rep. Bill Huizenga of Michigan, Sherman responded that “I’m not here to end any careers on Wall Street by explicitly identifying names.”
“There are those who we were in discussions with, some who actually agreed to come testify, then notified us that they decided it was in the interest of their careers that they not appear before us,” Sherman said.
Much of the hearing focused on the HFCA, a 2020 law that addressed China’s refusal to allow PCAOB inspections – per the Sarbanes-Oxley Act of 2002 – of auditors of Chinese companies traded on U.S. exchanges.
The HFCA would delist those companies after three consecutive non-inspection years. The hearing saw some support for a related draft bill, the Accelerating Holding Foreign Companies Accountable Act, that would shorten that delisting deadline to two years. The Senate passed its version of that measure in June.
Rep. Andy Barr, a Kentucky Republican, voiced support for the acceleration bill. And Rep. Bill Foster, an Illinois Democrat, told Sherman he looks forward “to further bipartisan action on this front.” Sherman had introduced the House companion bill to the HFCA last year, which Foster cosponsored.
“When we take action, one key question is whether the U.S. should act unilaterally, bilaterally, or multilaterally,” Foster said.
If the U.S. acts unilaterally to implement the HFCA and delist Chinese companies, Foster questioned whether “we risk triggering a regulatory race to the bottom, where the delisted companies would just, say, relist in London, Germany, Singapore, Hong Kong, or even dodgier locations.” He asked witnesses about discussions of potential multilateral agreements on minimum transparency standards for listed companies.
Karen Sutter, a specialist in Asian Trade and Finance at the Congressional Research Service, noted that under Chinese leader Xi Jinping “there’s been a big push for Chinese companies to come home” and list in Hong Kong or China as their only listing or a dual listing.
“One issue for consideration could be to look at U.S. standards with like-minded open transparent markets that lean on the rule of law in the sense that we do and compare those standards,” she said.
Samantha Ross, founder of AssuranceMark, the Investors’ Consortium for Assurance, who held multiple roles during her 15-year career at the PCAOB, agreed with Sutter’s characterization. She pointed to the SEC’s active membership in the International Organization of Securities Commissions (IOSCO), which she suggested may be the appropriate group to address the risks Foster was discussing.
Rep. Sean Casten, an Illinois Democrat, cited the possibility that delisted Chinese companies could return to U.S. markets through the “back door” of exempt offerings, which aren’t subject to same level of disclosure requirements as public offerings.
“I want to make sure we’re not playing wack-a-mole,” he said. “Let’s say that all the provisions of the Holding Foreign Companies Accountable Act get implemented, all the good ideas that both sides of the aisle have run up here are addressed, it seems to me we still have this huge gap, because all of these rules don’t apply when we get into these questions of exempt offerings.”
Ross agreed that “we not only have to protect our markets for public securities, but we also have to be concerned about if the companies are delisted, that they’ll take advantage of our system of exempt offerings that allow companies to sell securities here to specific kinds of investors under different circumstances and not follow our normal disclosure rules.”
Both the SEC and PCAOB have begun implementation of the HFCA, with the latter last month adopting a rule in Release No. 2021-004, Rule Governing Board Determinations Under the Holding Foreign Companies Accountable Act. The board is adding new Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act, which would establish a framework for the board to determine it is unable to inspect a public accounting firm in a foreign jurisdiction due to a position taken by that country’s government. The SEC is now seeking comment on the PCAOB rule. (See SEC Seeks Comments on PCAOB Rule Related to Holding Foreign Companies Accountable Act in the September 29, 2021, edition of ACA.)
In addition to the delisting threat, the HFCA also requires the companies to establish they are not owned or controlled by a foreign government, among other disclosure requirements. The SEC in late March issued interim final rules and request for comment in Release No. 34-91364, Holding Foreign Companies Accountable Act Disclosure that address the disclosure portions of the law. (See SEC Starts to Implement Rules to Address Chinese Company Audit Inspections in the March 25, 2021, edition of ACA.)
This article originally appeared in the October 27, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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