Securities and Exchange Commission chair Gary Gensler spoke to the ongoing discussions about the Holding Foreign Companies Accountable Act in an interview on Bloomberg “Balance of Power” show, in which he labeled negotiations as “constructive” but ultimately expressed uncertainty as to any resolution.
The Holding Foreign Companies Accountable Act was passed at the beginning of 2021 by Congress and requires that any foreign company looking to list in U.S. markets allow inspections of audits by the Public Company Accounting Board. If companies cannot or do not comply over the span of three consecutive years, they will be delisted.
“This is about access to our capital markets, it’s about access to the deepest, most liquid capital markets but you’ve got to play by the standard set of rules that 52 other countries play by,” Gensler explained.
It’s not a new sentiment by any means, and indeed is an extension of the Sarbanes-Oxley Act of 2002 that went into effect after the spectacular collapse of Enron and requires access to audit papers.
China is the only country that does not comply currently, though there has been a flurry of activity this year as regulators on both sides seek to find a way forward that would be amenable to both sides while preventing the 260+ Chinese companies currently listed in U.S. markets from being booted starting in 2024.
“It’s going to be choices made by the authorities there as to whether one, they’ll open their auditing books up to inspection and investigation; and two, whether this group called the Public Accounting Oversight Board will be able to conduct those full investigations and inspections,” Gensler said.
Gensler went on to detail how such cooperation would look, including meetings, taking testimony, and auditors being able to freely ask questions and access the actual audit papers.
“Though the talks have been constructive, I still really just don’t know right now,” whether there would be any real resolution, Gensler explained.
Brendan Ahern, CIO of KraneShares, added some color to the current outlook on the China Last Night blog, and believes that Gensler could be signaling something more to Congress in his discussions on the matter this week with both the Wall Street Journal and Bloomberg.
“It is feasible that Gensler was trying to communicate with Congress that shortening the HFCAA delisting window from three years to two years would be a mistake. In visiting with our political research firm yesterday, ACG Analytics, they believe the upcoming semiconductor subsidy bill doesn’t include shortening the HFCAA window at this juncture,” Ahern wrote.
In the meantime, many Chinese companies have taken matters into their own hands through dual listings in the U.S. and Hong Kong, and some Chinese companies are independently hiring third party U.S.-based auditors to meet the HFCAA requirements and be removed from the SEC’s non-HFCAA-compliant list of companies. Companies taking this route include ACM Research, a semiconductor process equipment manufacturer, Zai Lab, and BeiGene, a popular Chinese biotech firm.
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